What does it mean to be Fiscally sponsored?
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.
There are some concepts to understand as you begin to explore if fiscal sponsorship is the right option for you.
A person is not fiscally sponsored but an actual idea, concept, initiative or project (“Sponsored Project”) is fiscally sponsored AND, as such, it must be charitable in nature. The term “charity is a legal term. A 501c3 public charity is the sponsor (“Sponsor”). This is a recognized legal relationship by the IRS and there are many “fiscal sponsors” operating in the United States.
From a legal perspective, the Sponsor has all of the legal obligations in connection with the Sponsored Project. It has reporting obligations to the IRS and typically, income or property received on behalf of the Sponsored Project is reported on its tax return.
The sponsee (“Sponsee”) is either “you”, or a legal entity controlled by you.
Typically, the Sponsor and the Sponsee execute a legal agreement which will outline the relationship between the parties, including who has which obligations, etc. Various provisions are generally covered under a fiscal sponsor agreement including, rights and obligations, reporting obligations, indemnities, fees owed to Sponsor, expenses, termination rights, intellectual property rights, use of funds, etc.
From an accounting perspective, there are some safeguards for the Sponsee, all funds received on behalf of the Sponsored Project are restricted for the Sponsor Project, thus, a Sponsor cannot use the funds for any other purposes. If it were to do so, it would be illegal and may subject the Sponsor and its officers and directors to criminal liability.
Fiscal sponsorship does not mean that the Sponsor is providing the funds for the Sponsored Project. It generally means the Sponsee must generate its own funds and operate its own programs.
In applying for grants and other funding, the Sponsee will be applying underneath the legal structure of the Sponsor, utilizing the Sponsor’s tax identification number, bylaws, articles, etc. The Sponsee does not have an official board of directorsuhbg. It may have an advisory board or similar committee. The Sponsor may not disburse funds without Sponsee’s consent.
While this is a contractual relationships between the parties, one call tell that is quite symbiotic and requires understanding, trust, professionalism and collaboration.