A fiscal sponsor is a 501(c)(3) nonprofit organization that helps smaller projects or charitable groups by managing their finances or donations under its own legal status, allowing these third parties to receive tax-deductible donations and access funding, without needing to form their own 501(c)(3).
There are several reasons why a charitable project would look for a fiscal sponsorship. Having access to tax-exempt status through a sponsor allows a project to receive tax-deductible donations and apply for grants.
In addition, projects can focus on their mission and programs while the sponsor handles complex financial tasks, compliance, and legal requirements.
When a project is a short-term project or dipping its toes into the community, overhead could prevent the charitable work from happening. But, with a sponsor, the project can experience lower operational costs and leverage existing infrastructure.
By sharing resources with sponsors, the project can focus on community impact rather than finding its own resources.
Finally, some projects seek sponsorship before filing for their own 501(c)(3) in order to test concepts and determine how to best operate.
Components of a Fiscal Sponsorship
There are three components of a fiscal sponsorship: The fiscal sponsor, the fiscal project, and the fiscal sponsorship.
- Fiscal Sponsor: An established 501(c)(3) nonprofit organization that provides its tax-exempt status and infrastructure to a charitable project or new organization that does not have its own tax-exempt status.
- Fiscal Project: An initiative that operates under the umbrella of an existing nonprofit organization (the fiscal sponsor).
- Fiscal Sponsorship: A formal arrangement where the primary 501(c)(3) nonprofit provides fiduciary oversight, financial management, and other administrative services to the fiscal project.
Example: Understanding Fiscal Sponsorship
Susie Smith lives in the Evanson neighborhood in Cedar Moines, IA. The next street over has three vacant lots where the city cleared old homes several years ago.
The Evanson Community Group (aka the neighborhood coalition), got together, cleaned up the garbage on the vacant lots, mowed the lawn and planted various flowers to beautify the area.
The task was so successful that Susie proposed to the community group that they ask the city to approve community gardens. They quickly filed as a nonprofit with the state, put together a proposal, and submitted it to the city.
The city council approved the community garden, but with several requirements. The council would lease each lot for $1 per year, however, the nonprofit will need to provide a copy of their 501(c)(3) nonprofit status, and proof of general liability insurance.
Susie and the Evanson Community Group found themselves in a difficult position: They had not yet filed a federal 501(c)(3) application, nor did they have general liability insurance in place.
After doing some research, they sought advice from Gardening for the Future, a local gardening nonprofit that teaches inner-city kids about sustainable agricultural practices, growing their own food, and eating healthy.
After reviewing Susie’s proposal to the city and the requirements, the nonprofit proposed that they fiscally sponsor the community garden.
But a fiscal sponsor is just one component of a fiscal project.
Types of Fiscal Sponsorships Insured by NIA
Although there are more than six types of fiscal sponsorships, NIA can only insure two types: Model A and Model C types.
Model A (Direct Model or Comprehensive Fiscal Sponsorship)
In a Model A type, the project becomes a program of the fiscal sponsor, who then maintains control of it.
The sponsor is also legally liable for the project, including carrying a general liability policy.
In a Model A sponsorship, the sponsor directly receives donations and grants for the project, disperses funds, and is reported on the sponsor’s tax filings.
Model C (Grant Model/Pre-Approved Grant Relationship Fiscal Sponsorship)
In a Model C type, the project remains a separate entity.
In this case:
- The project presents a proposal to the sponsor.
- The sponsor then:
- Agrees to the sponsorship
- Receives funds from the grant
- Disperses funds to the project
The agreement also addresses who is the owner of the fiscal project’s work. It’s typical that the charitable project retains ownership.
Fiscal Agents Aren’t Customarily Within NIA’s Appetite
Some 501(c)(3) nonprofits only handle money for groups that do not have their own 501(c)(3) status.
In those cases, the nonprofit is acting as a “fiscal agent,” not a fiscal sponsor.
The difference matters: A fiscal sponsor has responsibility for how the money is used, and a fiscal agent usually just receives the money and passes it along.
So, while donations made through a fiscal sponsor may be tax deductible, donations made through a fiscal agent usually are not.
Because of that, NIA generally does not cover projects that use a fiscal agent unless there is a written agreement in place.
NIA also cannot cover projects if the fiscal agent gives up control over how the funds are used.
NIA’s Requirements of Written Agreements
Fiscal sponsorships should include a written agreement, also referred to as a memorandum of understanding (MOU), between the fiscal sponsor and the fiscal project.
For NIA to consider coverage, the MOU must include the following six components:
- Specification that the sponsor is responsible for all legal compliance relating to receiving, reporting, insurance, and acknowledging charitable donations.
- Description of the administrative fee that the project will pay to the fiscal sponsor.
- Designation of a “project leader” including a job description of responsibilities.
- Agreement that the project leader submit an annual report, including an annual budget.
- Acknowledgement of/agreement to engage in regular communication between fiscal sponsor and project leader.
- Specification that the project’s website (if one exists) will reference “a project of fiscal sponsor” with the sponsor’s name.
Insuring a Fiscal Sponsorship
- Fiscal sponsorships are not automatically covered under NIA policies.
- Coverage is not included on any NIA liability policy unless reported and approved.
- To consider coverage, NIA requires an MOU between the sponsor and project, regular communication between the sponsor and project leader, and the project leader must submit an annual report and budget.
- NIA must approve each new project, which is submitted through a Fiscal Project Supplemental form.
- The fiscal project receives the same coverage as the fiscal sponsor.
- Fiscal sponsors are not eligible for automatic renewal. A renewal update must be submitted each year with a list of projects.
Fiscal Sponsorship Missions in Practice
Across the country, people, groups, and projects count on nonprofits that provide fiscal sponsorship to help them get established, grow, and succeed as they work to benefit the community.
For many of these fiscal sponsorship organizations, NIA is their insurance provider of choice.
Several of these fiscal sponsorship nonprofits share that experience in a recent blog post, describing their mission work, why they chose NIA as their coverage provider, and how that coverage helps them better fulfill those missions.
This post is intended for general information only. It does not guarantee coverage, a defense, or any specific outcome.
Coverage depends on the specific facts and on the terms, conditions, and exclusions in your policy. Contact your insurance broker or agent to determine the appropriate levels of coverage and follow your policy’s claims reporting procedures if an incident may involve a claim.
This does not constitute legal, medical, financial, or professional advice. Any risk management practices mentioned are general suggestions and may not apply to every nonprofit. Follow all applicable laws, licensing rules, and reporting requirements.
