Fiscal Sponsor Agreement: What Is It?
Fiscal sponsors are an increasingly common tool of nonprofit start-ups, so I want to describe the two kinds of fiscal sponsor agreements that are typically used and a couple of related alternatives. To understand how these agreements work and their advantages and disadvantages, though, it is first necessary to understand what is a fiscal sponsor agreement.
A fiscal sponsor agreement is an agreement made by and between a project and an existing nonprofit corporation to provide fiscal sponsorship services to that project. In essence, the existing nonprofit corporation accepts donations from donors on behalf of the project in order that the project may be viewed as an existing nonprofit organization for purposes of fundraising. For example, an individual or a group of individuals may have come together to start a new nonprofit organization. Rather than going through the time-consuming and expensive process needed to create an independent nonprofit organization, the individuals may enter into a fiscal sponsorship agreement with an existing nonprofit organization that provides fiscal sponsorship services .
In addition to providing the above-described fundraising capability, a fiscal sponsorship agreement may provide for other support services, such as accounting or assistance in filing state and federal forms. This can be an attractive feature to new projects.
A fiscal sponsorship agreement can be viewed as a way for groups that have little funding to achieve recognition as a nonprofit organization without having to spend money unnecessarily to create a stand-alone nonprofit organization. At least in some cases, the amount of funds received is negligible. In many instances of fiscal sponsorship of new nonprofits, the funds received are more likely to be earmarked for expenses needed to accomplish the purposes for which the grant was made rather than in keeping an organization afloat either in terms of operating expenses and/or employee salaries.
Common Features of a Fiscal Sponsor Agreement
When entering into a fiscal sponsorship relationship, the sponsoring organization and project must have a clear understanding of the management, financial, and reporting requirements from the outset of the relationship. The agreement should clearly articulate the expectations of both parties and provide for continuity in the event of unforeseen circumstances. Separate written agreements are often prepared because the sponsorship agreement is typically too complex to be incorporated into a project’s bylaws. Below are the key components of a fiscal sponsor agreement:
Letter of Agreement: A brief document that outlines the basic terms of the relationship, such as the project’s purpose, how the relationship will end, and the amount of fees due to the sponsor.
The Form 990: The form 990 is a document every tax-exempt organization must file with the IRS every year. The requirements for the form 990 have recently been revised to create more transparency and accountability in nonprofit governance. One of the key components of the form is the list of revenues. The vast majority of the income received by the project or intermediary must be from an exempt 501(c)(3) charity.
The Fiscal Responsibility and Audit Agreement: This document outlines the procedures for business and financial management. It also outlines the requirements for the maintenance of the project’s books and records, preparation of the project’s financial, tax, and payroll records, and what reports the project must provide to the sponsoring organization. In addition, the fiscal responsibility and audit agreement provides a framework for evaluating the relationship and creating appropriate termination procedures.
Pros and Cons of Using a Fiscal Sponsor
A fiscal sponsor arrangement has advantages. Most notably, a fiscal sponsor can allow an organization that qualifies for 501(c)(3) tax-exempt status to be able to start operating earlier, enabling it to avoid the lengthy and costly process to obtain its own 501(c)(3) status and/or shortens the time it would take to apply for and receive that status. For an organization that is relatively small, wouldn’t qualify for 501(c)(3) public charity status on its own, or simply wishes to provide a more flexible offering of services or programs, this may be a productive relationship. In addition, a fiscal sponsorship is often more desirable than a for-profit business partnership or joint venture (which is often the only option available) to operate a charitable program.
Some of the disadvantages of using a fiscal sponsor are: The fiscal sponsor has complete control over the money that it collects on behalf of the nonprofit. Even though funds may be restricted by the donor for a specific purpose, the fiscal sponsor is legally and financially responsible for all of its activities and any misappropriation of funds that is not in accordance with its own organizational documents. As the fiscal sponsor technically owns any assets and property, the fiscal sponsor essentially has a veto power over the assets, no matter how restricted. The fiscal sponsor is also legally responsible for overseeing the fiscal sponsored program’s compliance with state and federal regulations. Therefore, the fiscal sponsor has the ability to determine how the funds received from donors for the fiscal sponsor program are used, as well as the ability to place reporting and oversight expectations on the fiscal sponsor program.
How to Choose the Right Fiscal Sponsor
When choosing a fiscal sponsor, it is incumbent upon the "sponsored organization" to ensure that the fiscal sponsor will be able to adequately meet your needs now and in the future. Unlike some collaborations that are fluid and ever changing, the relationship between a fiscal sponsor and a sponsored organization must be documented by a written agreement that may be modified only by mutual consent, which can come with its own set of challenges. For this reason, selecting the appropriate fiscal sponsor to complement your mission is critical.
An initial list of questions that should help guide you through your decision-making process can include: Not surprisingly, most financial sponsors operate under singular areas of focus; however, like any other organization, fiscal sponsors should seek to diversify their portfolios. As a result, they are less likely to have an interest in collaborating with a sponsored organization whose mission statement or intended activities are only minimally connected with the fiscal sponsor’s own mission.
It is also essential to find out what prior experience the fiscal sponsor has had with projects similar to yours, in terms of both scope and scale. If the fiscal sponsor has previously supported similar projects in the past, they are more likely to be able to provide you with guidance that is relevant to your specific objectives. In addition, the fiscal sponsor may have the applicable capacity (i.e., staffing, office space, etc.) to support your mission from a hands-on perspective.
Another area that should be addressed when making your decision is what the fiscal sponsor will do with your funds. Different fiscal sponsors have different terms of governance, and some may hold your funds in an account bearing interest, or even invest them. Though this could potentially be a way to generate additional income for your program, it is wise to conduct due diligence by asking for a clear explication of your fiscal sponsor’s investment strategy and history. If your fiscal sponsor does not have a clear game plan regarding how your funds will be used for your specific project, consider a different option.
Finally, a classic rule of thumb is to view your fiscal sponsor as a strategic partner. Accordingly, If they do not seem enthusiastic about your project, or the two of you cannot find common ground in your respective missions, chances are that your working relationship will not be fruitful in the long run.
Legal and Financial Considerations
The legal and financial implications of entering into a fiscal sponsor agreement can be significant and may impact not only compliance issues but also reporting obligations. As a starting point, there are two types of fiscal sponsorships that bear cost and compliance implications – (i) Model A, the type that requires little to no oversight of the sponsored organization’s activities and (ii) Model B that requires more stringent oversight and control by the fiscal sponsor.
Model A: Basic Oversight Model
Under Model A, which includes the 501(c)(3) defined in Annenberg Private Operating Found. v. United States, 130 F.2d 267 (9th Cir. 1987), management of the fiscal sponsor does not need to be exercised to the level of controlling the things done for the exempt purpose. The policies and procedures of the fiscal sponsor must ensure that funds to be expended on the sponsored organization are being used exclusively for activities in furtherance of the purposes for which it was formed and are in compliance with the requirements of applicable state solicitation laws. Importantly , the fiscal sponsor may not fund an individual or a group who have received no recognition from the IRS of their qualification as an exempt organization under section 501(c)(3) of the code (e.g., a group of individuals.
Model B: Grant Relationship Model
Under Model B, the fiscal sponsor delegates responsibility for carrying out the exempt purpose activities to the sponsored organization. Under this model the fiscal sponsor monitors the sponsored organization’s programs and budget and enters into a written contract that stipulates the terms and conditions of their relationship. There are some important tax and legal considerations that organizations should consider when entering into a Model B fiscal sponsorship relationship. Although the fiscal sponsor need not have complete control over the sponsored organization’s activities, it is important that the fiscal sponsor not relinquish responsibility for the changes in the sponsored organization’s programs or activities.
As indicated above, the federal tax law applies to both title III and title IV entities (as described above), and certain conditions regarding their compliance requirements apply equally across both types.
Case Examples of Successful Fiscal Sponsorship Scenarios
The following case studies represent a small fraction of the objective and laudable projects and programs that have utilized fiscal sponsor agreements to achieve their objectives. These examples also illustrate the range of scenarios and objectives for which fiscal sponsor relationships can be successfully established.
Healing Across the Lines Artist Collective (HALAC) In January 2014, a group of artists from North and South Macadam neighborhoods in Portland came together and developed a vision for 40th Street Greenway, a green pedestrian corridor along 40th Avenue. The group sought a 501(c)3 nonprofit fiscal sponsor to provide liability insurance and a bank account, as well as to receive tax-deductible donations. Know Your Own Bones adopted the cultural and historical diversity of the neighborhood as its mission, including the goal of creating the 40th Street Greenway, and began overseeing the project. HALAC is now a successful nonprofit organization, 40th Street Greenway has been constructed, and vegetative growth is currently underway.
Sankofa Collaborative Comprised of several smaller leaders in the Portland area, Sankofa Collaborative provides a wide variety of consulting, coaching, training, facilitation, conflict transformation, anti-racism, and community engagement services. The group has attracted multiple grants and awards in recognition of their impact. Arts and Culture Program, leading an effort to create center for African American cultural arts, was supported by Know Your Own Bones in its initial stages and is now an independent nonprofit in the Portland area.
Homeless Advocates in Crisis (HAIC) In 1995, two volunteers became aware of the growing crisis of homelessness on the east side of Portland. They organized public actions to bring attention to the plight of homeless adults and children. Despite the successful response from the community, they faced the challenge of having no infrastructure or place to send interested volunteers and concerned community members who wanted to become involved. Their solution was to team with Empowerment Initiatives, a 501(c)(3) nonprofit, that shared similar goals. HAIC was founded as a project of Empowerment Initiatives, allowing it to further its mission of fighting homelessness in the area by having access to a bank account and tax-exempt status.
Literacy Council of Washington County In 1992, a consortium of five nonprofit organizations formed the Literacy Coalition of Washington County, several of which had served locals with literacy skills, ESOL, GED, and related services for years. Gathering information regarding the number of people in Washington County unable to read or write, it became clear that the need for services far outweighed the resources available. The Coalition was awarded a $45,000 grant from The Collins Foundation, and with the help of Know Your Own Bones, applied for and won a grant from Weyerhaeuser totaling $733,000 to move forward with their mission to improve literacy and educational opportunities in the region. A year later, the Coalition became its own 501(c)(3), and added ESL, general education, and job readiness instruction to its services. Today, the Literacy Council of Washington County reaches nearly 1,000 adults per year and is a recognized leader in the field of literacy education.
What to Negotiate for in a Fiscal Sponsor Agreement
Tip #1: Setting the Agenda
The first step to a successful fiscal sponsorship negotiation is determining who’s going to negotiate, what the negotiating team’s initial objectives or priorities are going to be, and who’s going to be making the decisions when it comes to getting one or both parties to agree to the deal.
A good place to start the discussion is by asking your counterpart about their priorities and objectives for the negotiation. This can help you better understand how best to approach negotiations without burning bridges or getting into a heated argument with your potential counterparty.
It can be very valuable to have a written term sheet or other road map of what you propose to discuss/conclude. A term sheet is a non-binding letter setting out the main issues between the parties. It acts as a basis for further negotiations. The court in M&M Wacky Shack Pvt. Ltd. v. QRS Corp. explained that "a letter agreement . . . was ‘simply a summary,’ not a binding agreement." The judge noted that "the purpose of a term sheet is to increase the efficiency of the ultimate negotiations by laying a relative roadmap for the parties’ bargaining."
Tip #2: Selecting the Bargaining Chips
One of the advantages of fiscal sponsorship negotiations is that, unlike at business negotiations where something tangible is being exchanged a la "this for that," a fiscal sponsorship negotiation often involves intangible assets and goods.
This means that, potentially, any proposal made in the negotiation can be made to seem within reach for the other side. You may have data or information that is valuable to your potential counterpart; they may be able to provide you with political clout or access to an insider’s network.
Both sides need to think outside the box when it comes to deciding what is fair game to give up or ask for. A good negotiator builds rapport by first understanding the chips on both sides of the table, and then moving to get a win-win situation in which all parties are satisfied and agree to the deal.
Tip #3: Building a Strong Relationship
Good negotiating skills are all about creating long-term, functional relationships with all parties involved. It’s important to realize that the work doesn’t really start once the agreement is executed. It starts with the mutual desire to create a lasting relationship between the parties.
While the enormous paperwork involved in a fiscal sponsorship agreement may seem like an impediment to building trust between the parties , it isn’t. On the contrary, this documentation provides an opportunity to move forward from the past and begin anew. For example, while the fiscally sponsored organization would prefer to operate as a standalone entity, there are lingering issues from the prior independent organizational structure that, once documented, can be put to rest early on so that the new relationship can flourish.
Just as it’s important to set the agenda in terms of what the negotiations will look like and who they will involve, building a strong relationship with the other party will involve establishing clear agendas for each phase of the ongoing relationship.
Tip #4: Enforcing the Agreement
Unlike business deals where a handshake means a lot more than a signing of the dotted line, it’s often difficult to enforce an agreement in a fiscal sponsorship negotiation unless it’s written down. While some parties may be willing to enter an arrangement that is not enforceable, more often than not they are not going to put themselves in harm’s way unless they are able to get something in return.
However, if the fiscal sponsor is aware that, without the fiscal sponsorship, the project will fail, it may also be willing to enter a non-enforceable contract. Getting a non-enforceable agreement is not the end of the world because it can buy the time needed to inject the fiscal sponsor with enough enthusiasm to make it work.
If the other party is still not willing to sign a written term sheet or memoranda of understanding (MOU), then it’s time to reconsider entering into the relationship. The relationship should be developed slowly and involve only one party.
Tip #5: Selecting the Bottom Line
As a negotiator, your main goal is getting the agreement that makes the most sense for your client. While you may be tempted to hold out for the best deal, in reality it is better to accept an offer that gets you fairly close, rather than hold out endlessly for a deal that’s never going to come. For example, if your organization needs $100,000, then try to get a deal for $90,000. After all, you can always go back in the future for more money.
Another good strategy is setting deadlines for yourself. This can offset the emotional tendency to form a bond with your counterpart.