Fiscal Sponsorship

Topics Covered in This Article

• Benefits and Disadvantages of Fiscal Sponsorship
• Best Practices of Fiscal Sponsorship
• Overview of Fiscal Sponsorship Models
• Fiscal Sponsorship or Fiscal Hosting in the UK
• FAQ

Why Fiscal Sponsorship Matters

Fiscal sponsorship provides a crucial bridge for emerging nonprofits, projects, and social initiatives that need immediate operational and financial infrastructure without the delays and expenses of establishing their own tax-exempt status. This arrangement enables charitable projects to quickly access tax-deductible donations, grants, and legal protection while focusing on their mission rather than administrative complexities.

Who Typically Uses Fiscal Sponsorship

• Early-stage initiatives with promising ideas but lacking organizational infrastructure.
• Time-sensitive projects that need to begin operations before obtaining their own 501(c)(3) status (which can take 12-18 months)
• Short-term or experimental programs that don't warrant creating a standalone organization.
• Grassroots groups and community coalitions without experience in nonprofit management.
• International organizations establishing a presence in the US nonprofit sector.
• Established organizations testing new programs before committing long-term resources.

Fiscal sponsorship represents a strategic option in the nonprofit ecosystem, allowing emerging initiatives to build capacity, establish credibility, and demonstrate impact before taking on the full responsibilities of independent nonprofit status.

What is a Fiscal Sponsorship

A fiscal sponsor is a nonprofit organization with tax-exempt status (such as a 501(c)(3) designation with the IRS) that provides fiduciary oversight, financial management, strategic planning, and other administrative services for charitable projects. Going into a fiscal sponsorship can be an option for individuals or groups who have received or will be receiving grants or donations that do not wish to establish their own legal entity. Fiscal sponsorship can also be a fit for organizations that already have a legal entity but do not have tax-exempt status. However, the sponsored legal entity is still not recognized as tax-exempt; you are using the sponsoring organization's tax-exempt status.

The fiscal sponsor maintains control and oversight of the grant or donation funds, a requirement of a legitimate fiscal sponsor arrangement. Meaning the funds belong to the sponsor, not the sponsored organization.

The fiscal sponsor shoulders all of the legal and regulatory burden for the sponsored organization. In return, the sponsored organization or individual pays a fee, typically between 6-10% but can be higher. Some fiscal sponsors offer additional operational support above the basic financial and administrative support, and adjust their fees accordingly.

Benefits of Fiscal Sponsorship

• Having a fiscal sponsor can attract potential donors, as donated funds or grants will be tax-deductible for the donor.
• Donors and people working with your organization can be more confident you have proper oversight and compliance.
• Depending on the sponsorship model, fiscal sponsors often take care of the administrative and operational overhead and burden.
  • For example, fiscal sponsors often manage payroll and administrative tasks.

Disadvantages of Fiscal Sponsorship

• The fiscal sponsor has the final discretion on how to distribute and manage your funds.
  • All funds go to and belong to the sponsoring organization.
• You will need to relinquish control of the project over to the fiscal sponsor if you’re under a comprehensive model.
• As there are no laws on fiscal sponsorships, there’s a risk that government entities, such as the IRS or HMRC, can view your relationship as a mere conduit relationship which could lead to other financial and tax-related issues.

Best Practices

• Due diligence must be done on the sponsored organization or individual when choosing a fiscal sponsor (and vice versa).
  • The fiscal sponsor must have appropriate infrastructure and resources to handle your grant funding.
  • There should be policies and oversight processes that protect charitable assets and appropriate restrictions on using the funds.
• It is beneficial if the fiscal sponsor is aligned with the project’s mission, vision, and values.
• Have a written contract that describes and details the relationship between the individual or organization and the fiscal sponsor.

If you don’t know where to start your search, you can check out the following links:

• National Network of Fiscal Sponsors
• Fiscal Sponsor Directory

Overview of Fiscal Sponsorship Models

See our article on Fiscal Sponsorship Models for an overview of the types of fiscal sponsorship. The two most common fiscal sponsorship models are Model A and Model C.

Comprehensive Model - Model A

• In this model, all activities and transactions involved in the project are housed with the fiscal sponsor.
• All ownership and control of assets and liabilities are transferred to the fiscal sponsor.
• The project becomes an internal fiscally sponsored program, not a separate entity.
• The fiscal sponsor will shoulder all legal and administrative requirements, including paying employees.
• Paid staff members of the organization are considered employees of the sponsor.
• The fiscal sponsor can provide additional support outside of the basic financial and administrative needs, such as marketing, fundraising, event planning, and more.
• Funding goes directly to the sponsor.

Pre-approved Grant Relationship - Model C

• The fiscal sponsor and project have a grantor-grantee relationship, meaning that the individual or organization owns the project and all assets and liabilities.
• The project is considered a separate entity.
• The project is responsible for its own tax and filing obligations, and is legally liable and responsible for the project activities.
• The fiscal sponsor still has the ultimate discretion and control over the funding received. They are only fiscally liable and have sufficient control over the project’s funds to disperse them accordingly.
• This model can be used for one-time grants, but if additional fundraising is needed, it will be overseen and approved by the fiscal sponsor and typically carried out by the project staff.
• Funding goes directly to the sponsor.

For more information on the various model types and to determine which best fits your needs, see our article Fiscal Sponsorship Models.

Fiscal Sponsorship or Fiscal Hosting in the UK

In the UK, fiscal sponsorship is referred to as fiscal hosting. Just like in the US, there’s no official legal structure in the UK.

Overview of Fiscal Hosting in the UK:

• Best for charities that are not yet registered in the UK.
• The fiscal host/guarantor holds your project's funds on your behalf and therefore controls how the funds are spent.
  • A benefit for the grantee is that they can use the host’s legal entity and bank account. Obtaining a bank account in the UK as a charity is a difficult and lengthy process. Sponsorship helps cut through the process.
• The fiscal host provides legal assurance that the money is spent according to the project’s terms and goals.
• The fiscal host handles taxes, invoicing, accounting, and other administrative tasks that the organization might not have the resources or skills to execute.

FAQ

Is the sponsorship a legal arrangement? What are the legal aspects I need to know?

While the IRS does not recognize a fiscal sponsorship agreement as being tax-exempt, it is still a legal arrangement. In essence, the fiscal sponsor takes on all legal and fiscal liabilities with regards to the project.

• In a direct model, the sponsor is legally and financially responsible for the sponsee or the project. Therefore, they have full discretion and control over how the project is being managed, as well as any funds related to the project.
• In a pre-approved grant model, the fiscal sponsor still takes charge of the funding for your project. However, you will be taking on some responsibility and liability as the project is considered a legal entity.

Why would a Fiscal Sponsor reject my organization or decide not to sponsor?

There are a variety of reasons why an organization might reject your request to be fiscally sponsored. Remember, a fiscal sponsor decides to sponsor based on what aligns and supports their mission and goals, not yours. Some common reasons inlcude:

• Your project may not be in alignment with the fiscal sponsor’s mission or vision, or fit into the sponsor’s current projects and causes.
• The fiscal sponsor may have also uncovered information during due diligence for your project that was not in alignment with their goals.
• The fiscal sponsor may not have the bandwidth or staff to take on additional projects.

Who is my actual employer?
In a direct model, your employer is the non-profit organization that acts as your fiscal sponsor. The organization is in charge of handling your funds, as well as any employees that need to be hired. See our article on Fiscal Sponsorship Models for more information.

Will there need to be approval in the hiring process for my organization’s employees or board members?
In a direct model, the fiscal sponsor may hire any person they may deem fit or qualified. See our article on Fiscal Sponsorship Models for more information.

What does it mean to be under a 501(c)(3) status?

Having 501 status means that you are recognized by the IRS as a nonprofit organization. This means that you are exempt from paying federal taxes, and some state-specific taxes. You can also receive funding and donations to support your mission or charitable cause. There are different types of nonprofits, and one of the most common is a charitable organization, which has a 501(c)(3) status.

How will my money be capped, and how is it earmarked?

How your funds will be handled is under the full discretion and control of your fiscal sponsor. The fiscal sponsor’s job is to ensure that any donations received for the project will only be used for its intended purpose.

How do they control my funds?

The fiscal sponsor receives the funds on behalf of the sponsee, and allocates these according to the needs of the project. They have full discretion on how the funds will be spent.

What is in a Fiscal Sponsorship exit agreement?

A Fiscal Sponsorship exit agreement should provide, in detail, how the funds will be used when the sponsorship ends. It must indicate what assets should be transferred, should there be any remaining once the project is completed.

There should also be an agreement that any funds leftover should be transferred to another fiscal sponsor or a charitable organization that has similar projects.

What happens to my funds if I leave or exit the program?

Your funds will be transferred to another fiscal sponsor, or to another nonprofit organization that is aligned with your project. These will only be used to fulfill the goal of your project.

How can I get my funds if I leave?

You can only get the funds of your project after exiting a fiscal sponsorship if you decide to set up a charitable organization of your own. Here is an overview of how you can set up a nonprofit or charity in the US.

Do I have to follow the sponsor’s policy and employee handbook?

Yes. If you’re under the direct model, then the fiscal sponsor takes on all liabilities and responsibilities for your project. This includes employing any staff, and other policies governing the fiscal sponsor.

Additional References

• Suggested guidelines for a comprehensive fiscal sponsorship
• Suggested guidelines for a pre-approved grant fiscal sponsorship
• Sample fiscal sponsorship agreement

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