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Fiscal Sponsorship

A relatively small number of foundations award grants directly to individual artists; the vast majority limiting their funding to nonprofit organizations only. However, if you are seeking support for a project but are not affiliated with a nonprofit organization, you may be able to locate an organization to serve as your fiscal sponsor.  What this means is that the nonprofit organization would apply on your behalf for funding and, if received administer the funds and complete any required reporting.  

What is a Fiscal Sponsor?

  • An arrangement made between an individual or organization that is doing a program or project and wants to get support/funding from a foundation government agency or any tax-deductible donation from an individual or corporation with a tax-exempt organization. 
  • Fiscal sponsorships enable organizations or individuals access to funds that may not otherwise be available to them. 
  • Fiscal sponsorship is often temporary.
  • Fiscal sponsors are very selective in determining what projects to take on for fiscal agent relationships.  

Who can be a Fiscal Sponsor?

Any organization that is tax exempt under Section 501(c )(3) – (which means they have received a letter from the IRS approving the organization’s application for tax exempt status) may be a fiscal sponsor.  If you are seeking a fiscal sponsorship it is always a good idea to find  one whose mission will be enhanced or advanced by the project or program that you are proposing. 

  • Example of a fiscal sponsor arrangement:  
    • Leo Sanchez is a young dancer who has been adapting traditional Native American and Latin American dances forms.  He wants to establish a dance company to teach and educate the general public about Native American and Latin American dance.  He is not a 501(c )(3) organization and wants to test the water and become more financially stable before going out on his own.  Leo contacts the local City Arts Consortium, a 501(c )(3) nonprofit organization formed to promote artistic and cultural endeavors, and asks  them for fiscal sponsorship so he can apply to  grant making organizations and private foundations for support of the project. 

Types of Fiscal Sponsorship Models

There are a lot of variations for fiscal sponsorship arrangements:

  • Originators of the project become employees or volunteers at the sponsor organization for the duration of the project.  Health benefits and insurance may be covered. The sponsor will assist with securing funds for the project.
  • The project will have little financial independence and ownership of the project will likely remain with the organizational sponsor even if originator of the project gets his/her own 501(c) (3) status.
     
  • Example of a Fiscal Sponsor Model (Direct Project): 
    • Leo goes to the City Arts Consortium and is told that he can raise funds for his idea as a “project of” the Arts Consortium. The consortium stipulates that 10% of the funds raised will be used for general administrative costs of the organization, but that Leo can use the remaining funds for the project.  All funds raised however will be overseen by the consortium’s board of directors. Leo and his dance troupe become employees and volunteers of the Consortium and have to record and report monthly on their expenditures. Leo decides to leave this relationship because his application for 501(c)(3) status has been approved. All of the assets acquired while under the nonprofit sponsor organization legally belong to the sponsor. The sponsor retains the legal authority to insist (upon separation) that the project remains a part of the sponsor’s programming indefinitely. 

 

 Independent Contractor Project

  • Project belongs to the sponsor but the actual operation of the project is contracted out to a separate legal entity, which could be the originator.
  • Person contracted must have legal tax and accounting existence (for-profit or non-profit) and is responsible for paying income tax and self-employment tax.
  • With this model there is usually a set amount of work that will be produced or a certain deliverable that can be expected (film creation).
  • Generally, the person contracted will pursue funds in the name of the sponsor. 
  • Ownership of project will vary. If something tangible is purchased usually it is the property of the sponsor; however if it is intellectual property the courts may rule that the creator, or independent contractor owns the copyright.  This issue  should be addressed in the contract. 
     
  • Example of a Fiscal Sponsor Model (Independent Project):
    • A filmmaker engages  the Arts Consortium to pay him a flat fee of $100,000 for  personnel costs and other expenses related to the pre-production, production and post-production of a film.  If the film goes over budget the filmmaker will have to cover the additional costs and complete the film as stated in the contract.  Various ownership options are possible in this example, for instance;  the consortium may own exclusive distribution rights to the film throughout the first year but all other rights remain with the filmmakers.  It is best to work out these issues ahead of time and talk with a lawyer or accountant to determine all legal ownership and tax issues in advance.  Include these details in a contract.   

 

 Pre-approved Grant Relationship – aka “Regranting”

  • The fiscal sponsor distributes  grants to individuals and/or organizations without 501(c)(3) status.
  • The project  does not become a program belonging to the sponsor; there is a grantee/grantor relationship established. 
  • In this situation, the project originator will pursue funds in the name of the sponsor.  As the sponsor receives donations for the specific project, income is generated and then disbursed as a grant to the person or organization conducting the project. These grants are subject to the terms of the grant agreement that can stipulate  that the funds not be used for personal compensation (increases the sponsor’s liabilities). 
  • With this model and given the grant arrangements, a written agreement is required. In addition, the grant recipient and the sponsoring organization will have different tax obligations.
     
  • Example of a Fiscal Sponsor Model (Pre-Approved Grant Relationship):
    • An artist not affiliated with any nonprofit organization wants to do an outreach program in the schools and she goes to the local Arts Consortium to share her idea.  The Arts Consortium thinks it’s a valid cause however does not want full liability or ownership of the project.  The consortium agrees to fund project assuming all of the funds are raised.  A grant agreement is drawn up and the artist and the consortium go to the local City Foundation and request restricted funds for the outreach program. Funds are obtained and the sponsor distributes these to project-based expenses that follows an  agreed upon payment plan. This will  be considered taxable income for the artist and not the sponsor.   

 

Group Exemption

  • With this model, a central 501(c)(3) organization applies to the IRS for a group exemption covering its subordinates. 
  • The central organization, for example the Roman Catholic Church, supervises several subordinates or local chapters/units of the central organization.  Each of the subordinates is separately liable for its own contracts, payment obligations, etc. and essentially acts on their own. 
  • This means is that the local chapters or units can receive funding directly. 
  • Although this seems simple, there are several requirements made by the IRS for group exemption (p44).
  • This option allows for a lot of independence with specific requirements. 
     
  • Example of a Fiscal Sponsor Model (Group Exemption):
    • The Arts Consortium obtains an IRS group exemption and several artists set up their own nonprofit organization following all of the requirements.  The artists apply directly to government agencies, foundations and other sources for funding under the name of their own organization using the consortiums group exemption letter.  At the end of the year the subordinate organizations under the consortium must file their own taxes, unless otherwise agreed upon.

 

Getting a Written Agreement

As soon as a fiscal sponsor agrees to sponsor a project; the expectations  should be set forth in a written agreement delineating responsibilities  acceptable to both parties involved.  It is important to include any conditions for releasing the project early, responsibility for liabilities (unpaid bills), intangible assets (logo, name) and tangible assets (inventory, cash, equipment).  This is especially true for those models where the originator has less independence. 

See Fiscal Sponsorship Arrangements, published by Lawyers Alliance for NY.

 

Finding a Fiscal Sponsor

In searching for a fiscal sponsor, you should seek out organizations that have a demonstrated interest in programs or projects similar to yours. It will be easier to find a fiscal sponsor if your project enhances or furthers that organization's mission and purpose; and if that organization benefits in some way from being associated with your project.

In order to develop a list of potential fiscal sponsors, begin with your current affiliations. Make a list of the professional societies, educational associations and institutions, religious organizations, social and recreational clubs and other groups with which you are already associated, including employers.

There are a number of resources for finding a fiscal sponsor. This list just provides a few.  

  • Guidestar- This database allows you to search for non-profit organizations within your local area. You can gather information in regard to their mission, vision, and strategic plan to see if your project aligns with what they do.
  • Foundation Center- This website is a great tool for discovering more non-profits in your local area. In addition, there are a number of tools and tips for seeking funding. 
  • Fiscal Sponsorship: 6 Ways To Do It Rightby Gregory L. Colvin – This book provides extensive guidance to seeking a fiscal sponsor.

Approaching a Potential Sponsor

  • Do your research (use foundation center, internet).
  • Make a list of all your current affiliations (religious, education, professional societies).
  • Find organizations that demonstrate an interest in programs or projects similar to yours (that enhance the organizations mission).
  • Find out what their sponsorship requirements may be.
  • Determine if organizations have a track record with foundations or corporate funders.
  • Present a business plan outlining programs, goals and projected funding sources (include research). 

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