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In the simplest terms, "fiscal sponsorship" is one entity accepting and managing funds for another. Fiscal sponsorship is commonly used when an arts project wants to secure funding from sources that give only to nonprofit organizations with IRS tax-exempt status. These can include foundations, government agencies, corporations, or individual donors who wish to receive tax deductions in return for their contributions. To be considered exempt, an organization must hold a current 501(c)(3) certificate from the IRS. However, many artists prefer not to attempt the involved and costly process of securing tax-exempt status themselves. Instead, they may contract with a nonprofit fiscal sponsor to extend tax-exempt status to their project, if the project furthers the nonprofit's charitable goals. According to standard principals and law, projects contracted with a fiscal sponsor must be consistent with the fiscal sponsor's charitable purposes. Having a nonprofit fiscal sponsor does not make an individual "nonprofit" or "tax-exempt" only the IRS can make a tax-exempt ruling. Artists who are launching new endeavors, where the long-term viability of the project is yet to be determined, may find that operating under a fiscal sponsor allows them to begin programs and services for a trial or incubation period prior to filing for independent incorporation. Similarly, artists who have been operating informally for some time and are beginning the process of incorporation, may want to apply for charitable funds through a fiscal sponsor while that incorporation process is under way. Other artists choose to remain fiscally sponsored for a longer period of time, making use of the nonprofit's infrastructure to support their small volunteer-based projects. The primary advantage to working with a fiscal sponsor is that it allows an individual or unincorporated group of artists to solicit funds from philanthropic sources. These donations are then tax-deductible to the fullest extent allowed by law. In-kind contributions may be tax-deductible as well, if the gift is used only for purposes related to the project. It is important to note that the sponsor must exercise control over the funds that it receives on behalf of the project. In fact, the sponsor may lose its tax- exempt status for failure to exercise sufficient control, permitting those funds to be used in a non-charitable manner. The Intersection Incubator's fiscal sponsorship program is based on a model of preapproved grant relationship, known colloquially as a Model C relationship. According to Greg Colvin's 1993 book, Fiscal Sponsorship: Six Ways to Do It Right (SF Study Center, 1993): In Model C, the project does not become a program belonging to the sponsor. Instead, the sponsor chooses to further its exempt purposes indirectly by giving financial support to another entity or person for a specific project that the sponsor has reason to believe will advance the sponsor's charitable goals. The sponsor is not seeking ownership of any part of the results of the work, but simply an assurance that the project will use the grant funds in a reasonable effort to accomplish the ends described in the grant proposal. The sponsor and the project sign a written grant agreement setting forth all the terms and conditions that apply to the project's use of the grant and relations with funding sources. The specific work to be performed by the project using grant funds should be spelled out. The project, the sponsor, or some combination of the two, solicit funds for the specific grant to be made by the sponsor to the project. Such solicitations shall be made only on the condition that the sponsor retains complete control and discretion over the use of all contributions it receives. Ordinarily, however, the funds for a preapproved grant are solicited for a particular purpose. Funders would naturally expect the sponsor of a preapproved project to fund the project so long as the project follows its grant agreement. For instance, the terms of a government grant to a sponsor might provide that the funds are to be spent for a specific work of art to be created or film to be produced, with the funds to be returned to the government agency if the project fails. Similarly, if a project has been adhering to its grant agreement with a sponsor and the sponsor is holding back funds for the project, the project should be able to enforce the grant agreement as a contractual obligation of the sponsor to pay. (If no one else can finish the project, the law of cy pres requires the sponsor to use the funds in a manner that will accomplish the donor's intentions as nearly as possible. If the funds originally came from a government agency or private foundation grant, that contract or grant agreement may dictate the final disposition of funds.) The sponsor may establish a charge for general administration. Commonly the charge is set at a certain percentage of the funds raised for the project. In actuality, the sponsor is not charging the project a fee; the sponsor is simply retaining a certain portion of funds which are the sponsor's property anyway. The liabilities of the grantor are generally quite limited in a grantor-grantee relationship. The grantee does not act as the agent of the grantor legally, and so any obligations incurred, damages or injuries caused, or misconduct committed by the grantee, should not be the responsibility of the sponsor. Basically, the sponsor is liable only for properly selecting and paying the grantee, and for reasonably monitoring the grant to make sure the funds are spent in accordance with the grant agreement. - Greg Colvin, Fiscal Sponsorship: Six Ways to Do It Right Click here to read book synopsis Answers to other frequently asked questions on fiscal sponsorship can be found at the Nonprofit Genie. Please note that the Intersection Incubator does NOT itself award grants or apply for grants on behalf of its members. Instead, it provides Incubator Members with the access and resources to apply for outside funding sources that are legally restricted to funding only 501(c)(3) nonprofit organizations. Star Mountain would not have been made possible in such a short time if it wasn't for Intersection's fiscal sponsorship. - Marina Shterenberg, Star Mountain Art |
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