The beginning stages of any new nonprofit venture greet its founders with various choices for formalizing the project.
Founders can decide whether to find an existing nonprofit to partner with or to go it alone and undertake the 501(c)(3) process themselves. The choice of fiscal sponsorship is also an established option that can bring your charitable venture to life sooner. There are multiple fiscal sponsorship models available and it’s important to understand the nuances of each model and pick the one that works best for your project.
What is fiscal sponsorship?
Fiscal sponsorship occurs when a charitable venture that does not have tax-exempt status forms a relationship with an existing 501(c)(3) nonprofit organization. The tax-exempt organization, or fiscal sponsor, lends its tax-exempt status, facilitates operations, and enables grants that advance the mission of the charitable venture.
The American Bar Association summed it up nicely “While forming a nonprofit corporation and applying for income tax exemption will be the right choice for some clients, there are often alternatives that may more efficiently and effectively allow a client to achieve his or her charitable goals. Fiscal sponsorship is one such alternative.”
Some look to fiscal sponsorship as an efficient and effective way to start a new nonprofit endeavor. Fiscal sponsorship models can differ in their structure and benefits, and finding the right sponsorship model will help your venture run smoothly.
What are the different fiscal sponsorship models?
There are seven fiscal sponsorship models, with structural differences between them. The more commonly sought models are direct, independent, and pre-approved grant models.
Let’s look at these three models to help you understand which would most benefit your project.
Fiscal Sponsorship Models: Direct Fiscal Sponsorship, Comprehensive Fiscal Sponsorship, Model A
With direct fiscal sponsorship, also called comprehensive fiscal sponsorship, or Model A fiscal sponsorship, the project essentially becomes one of the fiscal sponsor’s programs. Personnel that supports the project are or become staff of the sponsor, through the agreement.
The fiscal sponsor directly receives donations and grants for the project, and the receipt and use of these funds are reported on the sponsor’s tax filings. A fiscal sponsorship agreement is usually required, along with a sponsorship fee. The sponsor is responsible for the government filings, compliance tasks, fund disbursement, and financial reporting. The sponsor maintains control over the funds and while this may seem a tradeoff for some, it protects both parties.
In Model A, the charitable project operates as an ‘in-house’ program whereas in Model B the project is performed outside the fiscal sponsor’s programs. Model A and B are similar in that the fiscal sponsor has fiduciary responsibility for the venture.
Fiscal Sponsorship Models: Independent Fiscal Partnership, Model B Fiscal Partnership
In an independent fiscal partnership, or a Model B fiscal partnership, the charitable project is independent, and not directly operated by the staff of the fiscal sponsor. Rather, the charitable sponsored project functions as more of an independent contractor, that operates under the sponsor while focusing on the mission. Donations to the project enjoy tax-deductible status and are received and disbursed by the sponsor. Under Model B fiscal sponsorship, the sponsee also has increased access to grants.
Ribbon provides charitable projects the independence and autonomy that is enjoyed with an independent fiscal sponsorship model. Charitable projects can focus on their mission while our tools lighten the administrative and compliance burdens. Ribbon maintains fiduciary oversight protections, so your venture can function with ease of mind.
Fiscal Sponsorship Models: Preapproved Grant Relationship Fiscal Sponsorship, Model C Fiscal Sponsorship
In the preapproved grant relationship model, the role of the fiscal sponsor is more limited than in other models. The project is separate from the fiscal sponsor’s portfolio, though it may be in line with their mission. The fiscal sponsor’s main role is to receive grant funds and disburse them to the project.
This grantor-grantee type agreement is more hands-off than in other models. Fund oversight is still necessary by the sponsor to keep both parties protected and within IRS compliance standards.
Limited Liability Company Fiscal Sponsorship Model L Fiscal Sponsorship
In this model, a single-member LLC is the sponsee and is treated as part of the sponsor for tax purposes. The sponsee can receive tax-deductible contributions and grants in its own name.
Other less used forms of fiscal sponsorship
Group Exemption Fiscal Sponsorship Model D Fiscal Sponsorship:
In this model, the sponsor serves as the head of a group exemption as allowed by the IRS. The sponsor is able to lend 501(c)(3) status to projects that are separate legal entities but are affiliated with the sponsor. The relationship is similar to that of a parent (sponsor) and a subsidiary (sponsee).
Supporting Organization Fiscal Sponsorship Model E Fiscal Sponsorship
This model operates under strict regulation and can be used by organizations that have tax-exempt status that want to support a sponsor’s charitable goals. The results and funds are owned by the sponsee.
Technical Assistance Fiscal Sponsorship, Model F Fiscal Sponsorship
In this Technical Assistance model, the sponsee has its own 501(c)(3) status and all funds belong to the sponsored project, with financial management and administration provided by the sponsor’s employees.
Navigate Fiscal Sponsorship with Ribbon
The nonprofit back-office and financial platform to create and manage charitable programs.
What do fiscal sponsorship models have in common?
Charitable projects turn to fiscal sponsorship for a few reasons. Often, these groups lack the infrastructure necessary for continued program success. Concerns about staffing, record keeping, and compliance tasks can become barriers to entering the nonprofit sector.
Each fiscal sponsorship model carries inherent benefits, and though the forms they take can vary, fiscal sponsorship models offer:
- Increased program capacity
- Tax-exempt status and increased grant eligibility
- Administrative expertise, tools, and back office management
- ‘Borrowed’ credibility from the established nonprofit sponsor
The charitable project may have a time-sensitive need that cannot be addressed while simultaneously managing administrative and operational needs. The fiscal sponsor brings their operational tools to the table and is able to cover back office gaps for those running the sponsored project.
Most causes desire tax-exempt status in order to receive funds from donors or grantees. Being able to operate under the fiscal sponsors’ tax-exempt status brings deductibility relief for the sponsored group. In addition, new groups that lack a track record can benefit from the legacy and reputation of existing nonprofit organizations. This lends itself to projects who need to attract funding and whose donors or funders value nonprofit stature.
The benefits of most fiscal sponsorship models include saving upfront costs and time. For new projects or those without the capacity to tackle compliance tasks, there is added security imparted by relying on the sponsor for liability protection.
Wrapping it all up
The nuances of each model will clarify which type of fiscal sponsorship model is best for your charitable cause. Fiscal sponsorship facilitated by Ribbon offers a quick and efficient way to start and maintain charitable projects while enjoying relief from red tape and compliance burdens.
