FISCAL SPONSORSHIP: Expanding Impact While Managing Risk NONPROFIT ORGANIZATIONS OFTEN HAVE MORE charitable activities to accomplish than they have time or resources to spend. Conversely, many unincorporated organizations or for-profit entities have the enthusiasm and resources to accomplish charitable purposes but lack the Section 501(c)(3) status that would exempt them from taxes incurred related to those activities. Fiscal sponsorship can provide the solution to both problems. The processes required to obtain Section 501(c)(3) status can be expensive and time consuming for new nonprofits. But through fiscal sponsorship, nonprofits can support individuals and nonexempt organizations to further exempt charitable purposes. Fiscal sponsors share their tax-exempt status with non-exempt organizations to allow more people to access the benefits of the philanthropic community and to reduce barriers to entry. Most commonly, fiscal sponsorships are structured so that a public charity acts as the fiscal sponsor (Sponsor) and provides aid to a new (not 501(c)(3) exempt) charitable project (Project). The Sponsor might provide technical know-how, administrative resources, or funding to support the Project. If the Sponsor receives donations that it regrants to the Project, the Sponsor must maintain complete discretion and control over the use of the funds in order to avoid jeopardizing the donation’s tax exemption.1 The Sponsor must also ensure the payments to the new Project further the charity’s exempt purpose. THE MODELS Fiscal sponsorship experts have successfully structured fiscal sponsorships in a variety of ways.2 The best structure depends on the project’s individual circumstances. Often the main question when determining how to structure the Sponsor-Project relationship is how much control each party will have over the activities and result. This article reviews some of those structures. Model A: The “Direct Project” Model3 One of the most common ways to structure a fiscal sponsorship to give the Sponsor maximum control is the Direct Project Model. In this model, the Project is internal to the Sponsor’s tax-exempt entity. The Project organizers may have the energy to accomplish a charitable project, but, for whatever reason, they do not want to form their own Section 501(c)(3) entity immediately. In Model A, the Project organizers approach a Sponsor with their idea, the Sponsor does due diligence to ensure the Project furthers its exempt purposes, and the Project organizers become the Sponsor’s direct employees or volunteers.4 The Sponsor is responsible for all management of the Project: executing the Project, insuring the Project, funding the Project. It is also responsible for any liabilities or taxes the Project might incur. This Model is the most labor intensive for the Sponsor, but it also provides the Sponsor with the most direct influence over the Project’s activities. It also leaves open the possibility of spinning the Project into its own Section 501(c)(3) organization once the Project can stand on its own. BY HANNAH FISCHER FREY AND CHRISTOPHER THORPE, BAIRD HOLM LLP 22 Nebraska CPA
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