Many fiscal sponsors enter into relationships to support multiple fiscally sponsored projects (“Projects” or “FSPs”). Typically, these fiscal sponsors have some screening mechanism before agreeing to enter into these relationships, but often, the screening is superficial, resulting in significant risk exposure and/or undesirable administrative burdens for the fiscal sponsor. Proper screening is of critical importance to the livelihood and impact of fiscal sponsors.

Introduction

From a legal perspective, fiscal sponsorship in its most common forms involves a fiscal sponsor authorizing individuals associated with a Project to fundraise on behalf of the fiscal sponsor exclusively for the 501(c)(3) purposes of the project.

In a comprehensive or Model A fiscal sponsorship arrangement, the Project’s charitable activities are operated by, and within the legal framework of, the fiscal sponsor, meaning that all of the assets, rights, liabilities, and obligations of the Project are those of the fiscal sponsor since the Project has no separate and independent legal existence.

In a pre-approved grant relationship or Model C fiscal sponsorship arrangement, the Project’s charitable activities are operated by an individual or separate and independent legal entity (the grantee) subject to all of its own tax and filing obligations.

Screening: Model A Projects

A Model A fiscal sponsor should consider a prospective FSP in a manner similar to a nonprofit considering an acquisition in which another legal entity merges into the nonprofit.

  • Project’s 501(c)(3) purposes – Is the Project’s purposes consistent with the fiscal sponsor’s? This should require a review of the fiscal sponsor’s purpose statements in its governing documents to ensure it will not be acting outside of its corporate authority.
  • Project’s guiding values – Are the Project’s guiding values consistent with the fiscal sponsor’s? For example, if the fiscal sponsor includes DEI as a core value, it should not take on a Project whose values are incompatible with DEI principles.
  • Project leadership – Have the Project’s leaders been vetted to provide assurance to the fiscal sponsor that they can reasonably delegate the necessary management authority to such individuals to lead the Project? Remember that any failure in their leadership resulting in harm to another party may be a liability of the fiscal sponsor.
  • Project’s activities – Have the Project’s activities been vetted to provide assurance to the fiscal sponsor that they are consistent with the fiscal sponsor’s 501(c)(3) status, internal policies, and risk tolerance? Remember that any FSP organized or operated activity that results in harm to another party may be a liability of the fiscal sponsor.
  • Project’s support – Does the Project have sufficient financial and other support to be viable for the minimum term expected by the fiscal sponsor? Some FSPs may be sponsored as experiments so long-term viability may not be particularly important to a fiscal sponsor, but many, if not most, fiscal sponsors expect initial commitments to ensure short-term viability.
  • Fiscal sponsor’s capacity – Does the fiscal sponsor have administrative, legal, technological, and other capacity to provide the support desired by the Project and necessary to assure external and internal compliance?

Screening: Model C Projects

A Model C fiscal sponsor should consider a prospective FSP and grantee from two perspectives: (1) whether the persons raising funds for the 501(c)(3) purposes of the Project are sufficiently trustworthy and equipped to act as authorized agents of the fiscal sponsor in such fundraising, and (2) whether the grantee is sufficiently trustworthy and equipped to use the grant funds responsibly to further the 501(c)(3) purposes of the Project housed within the grantee.

  • Project’s 501(c)(3) purposes – Is the Project’s purposes consistent with the fiscal sponsor’s? This should require a review of both parties’ purpose statements in their respective governing documents to ensure the fiscal sponsor will not be funding activities outside of its corporate authority.
  • Project’s guiding values – Are the Project’s guiding values consistent with the fiscal sponsor’s? For example, if the fiscal sponsor includes DEI as a core value, it may not want to fund a Project whose values are incompatible with DEI principles.
  • Project leadership – Have the Project’s leaders been vetted to provide assurance to the fiscal sponsor that they are reasonably capable of implementing the Project, raising funds as agents of the fiscal sponsor in a responsible and compliant manner, and fulfilling the fiscal sponsor’s reporting requirements.
  • Project’s activities – Have the Project’s activities been vetted to provide assurance to the fiscal sponsor that they are consistent with the fiscal sponsor’s 501(c)(3) status and internal policies?
  • Project’s support – Does the Project have sufficient financial and other support to be viable for the minimum term expected by the fiscal sponsor? Some FSPs may be sponsored as experiments so long-term viability may not be particularly important to many fiscal sponsors, but many, if not most, fiscal sponsors expect initial commitments to ensure short-term viability through the implementation of the funded activities.
  • Fiscal sponsor’s capacity – Does the fiscal sponsor have administrative, legal, technological, and other capacity to provide the support desired by the Project and necessary to assure external and internal compliance?

Fiscal Sponsorship Agreement

The proper fiscal sponsorship agreement is also a critical element of the fiscal sponsor’s capacity to fiscally sponsor a project. I’ll note that I’ve come across a great many fiscal sponsorship agreements drafted without proper legal expertise in this area in a way that jeopardizes all parties. Because fiscal sponsorship is not legally defined and can take on several different forms, it is critical that the fiscal sponsorship agreement set forth the provisions that properly account for:

  • The other party to the fiscal sponsorship agreement
  • Fundraising solely by the fiscal sponsor and its authorized agents
  • Whether the programmatic activities of the FSP are internal (e.g., Model A) or external (e.g., Model C) as to the fiscal sponsor
  • The restricted fund set up within the fiscal sponsor for the purposes of the Project (and not for a specific nonexempt grantee)
  • The discretion of the fiscal sponsor to expend the funds in the Project restricted fund consistent with the exempt purposes for which the restricted fund was created (also referred to as variance power), even if not regranted to a previously approved grantee and other party to the Model C fiscal sponsorship agreement
  • Termination (the subject of a future post – see also Fiscal Sponsorship – Exit and Transfer of Assets)

The post Fiscal Sponsor: Before You Accept a Project … appeared first on Nonprofit Law Blog.