The Legal and Financial Responsibilities of Being a Fiscal Sponsor

The Legal and Financial Responsibilities of Being a Fiscal SponsorFiscal sponsorship presents a compelling opportunity for nonprofit leaders to extend their mission, support emerging initiatives, and potentially diversify revenue streams. However, while fiscal sponsorship can offer numerous benefits, it also entails serious legal and financial responsibilities. Understanding these responsibilities is crucial before embarking on a fiscal sponsorship journey. This post, “The Legal and Financial Responsibilities of Being a Fiscal Sponsor” will walk you through the key legal and financial responsibilities that come with being a fiscal sponsor.

What is Fiscal Sponsorship?

Before we dive into the responsibilities, let’s first ensure we have a clear understanding of what fiscal sponsorship is. In essence, a fiscal sponsorship relationship involves a nonprofit organization (the fiscal sponsor) offering its legal and tax-exempt status to a project or group that does not have 501(c)(3) status. This allows the group or project to seek grants and solicit tax-deductible donations under the sponsor’s exempt status. Now, let’s turn our attention to the responsibilities that come with this arrangement.

Legal Responsibilities of a Fiscal Sponsor

When an established nonprofit agrees to be a fiscal sponsor, it takes on significant legal responsibilities for the projects it sponsors.
  1. Compliance with Laws and Regulations
    As the legal entity behind the project, the fiscal sponsor is responsible for ensuring compliance with all relevant laws and regulations. This includes federal and state laws governing nonprofit organizations and specific laws related to the project’s activities.
  2. Responsibility for Funds
    The fiscal sponsor holds the legal responsibility for the funds received on behalf of the sponsored project. It must ensure that all funds are used for charitable purposes and in accordance with the grantors’ restrictions.
  3. Liability The fiscal sponsor is legally responsible for the actions of the sponsored project. This includes potential liabilities arising from the project’s operations. It’s important to consider potential risks and ensure you have appropriate insurance coverage.
  4. Reporting and Transparency The fiscal sponsor must include the sponsored project’s activities and financials in its own reporting. This includes reporting to the IRS, state regulators, and donors. Transparency is key to maintaining public trust and meeting legal requirements.

Financial Responsibilities of a Fiscal Sponsor

The financial responsibilities of a fiscal sponsor are closely linked to the legal responsibilities.
  1. Financial Management and Oversight
    The fiscal sponsor must provide financial management and oversight for the sponsored project. This includes budgeting, accounting, financial reporting, and compliance with financial restrictions imposed by donors or grantors.
  2. Disbursement of Funds
    As the legal recipient of the funds, the fiscal sponsor is responsible for disbursing funds to the project. The sponsor must ensure the funds are used as intended and in compliance with any restrictions.
  3. Charging Administrative FeesThe fiscal sponsor usually charges an administrative fee for the services it provides to the sponsored project. The fee must be reasonable and reflect the actual services provided. This fee also needs to be clearly communicated and agreed upon with the sponsored project.
  4. Record KeepingThe fiscal sponsor must maintain accurate and detailed records of the sponsored project’s financial activities. This is crucial for audit purposes and for fulfilling reporting requirements.
  5. Audits and Tax ReportingThe fiscal sponsor’s financial responsibilities extend to conducting or arranging for audits, as necessary, and ensuring accurate tax reporting. The sponsored project’s financial activities must be included in the fiscal sponsor’s own financial statements and tax reports.

Conclusion

The decision to become a fiscal sponsor should not be taken lightly. While it can offer benefits such as increased mission impact and revenue diversification, it comes with significant legal and financial responsibilities. Before entering into a fiscal sponsorship agreement, ensure you fully understand these responsibilities, have the capacity to fulfill them, and have taken necessary steps to mitigate potential risks. With careful consideration and diligent management, fiscal sponsorship can be a powerful tool for nonprofits. It offers the potential to support emerging initiatives, foster innovation, and extend your organization’s reach. Just remember, with great potential comes great responsibility especially when it comes to the legal and financial responsibilities of being a fiscal sponsor. Remember to always seek professional legal and financial advice before entering into a fiscal sponsorship agreement. This post is meant as a guide and does not replace professional advice.

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The Legal and Financial Responsibilities of Being a Fiscal Sponsor

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