The question “what does it mean to be fiscally sponsored” is very interesting question indeed.

There are five (5) main types of structures that can be used to accomplish charity. Fiscal sponsorship is one of the structures. In fact, it can be quite powerful and helpful to be fiscal sponsored by an existing 501c3 on inception because there are so many challenges. Not having to worry about legal and accounting is a huge relief. Another option, is utilizing a donor advised fund, however, this is not advisable unless you are simply giving to a United States approved 501c3 public charity. The other three (3) structures available involve establishing your own legal entity and a legal discussion is beyond this article.

Whether a nonprofit can serve as a fiscal sponsor is a very good question indeed.

It is important to understand that being a nonprofit does not mean that the entity is exempt from taxes nor does it mean that the contributions received are tax-deductible. To supplement, a nonprofit is formed in one of two ways, either it is established as a nonprofit corporation or as an unincorporated association. In either case, if the nonprofit has not sought tax exemption from the IRS, then, it absolutely cannot act as a fiscal sponsor and you should not utilize its services as a fiscal sponsor.

The terms “fiscal agent” and “fiscal sponsor” have two very distinct legal and tax connotations.

In conducting due diligence to determine whether to utilize a fiscal sponsor or a fiscal agent, it is not enough to simply determine whether the organization is classified as a 501c3 public charity in good standing.

An intrinsically important question is to determine the legal status of the sponsee desiring to be sponsored. Is the entity desiring to be sponsored itself, a 501c3? If the answer is no, then, it is highly unlikely that a fiscal agent relationship is desirable (explained more below). On the other hand, if the entity is in fact a 501c3, a fiscal agent relationship may in fact be completely acceptable.

That being said to really understand this question, one must dig deeper into the meaning and thus distinctions between these two terms as the IRS views them.

A fiscal sponsor agreement is a contract between a fiscal sponsor (defined below) and a fiscal sponsee (also defined below). This contract is very important for the fiscal sponsee because without which the sponsee literally owns nothing as the sponsor would “own” the charitable initiative. Also, like any other business relationship, a sponsee needs to have total clarity on its rights so that in the event of a dispute, one can simply refer to the contract for guidance. That being said, in our opinion, a contract such as this should cover all kinds of topics including, but not limited to, services rendered, compensation to sponsor, financial reports, costs, insurance, indemnities, warranties and representations, protocols for the funds and disbursements, termination, intellectual property provisions,etc.