Creating the Ideal Fiscal Sponsorship Template

Getting to Know Fiscal Sponsorship Agreements

From the IRS’s perspective, a fiscal sponsorship exists when a charitable project, which may or may not be affiliated with a recognized charity, is the recipient of implied sponsorship from that charity (or other, similar nonprofit organization). Implied sponsorship can come from (1) a mechanism where the charitable project receives its income under the auspices of a recognized, sponsoring charity (a "Type 3" fiscal sponsor) or (2) a mechanism, for example, generally provided for under a state’s law of agency (a "Type 1" fiscal sponsor).
In most instances of fiscal sponsorship, a charitable project will choose to operate as the project of a recognized charity, instead of seeking its own recognized status . However, any charitable project may-free of certain restrictions and obligations-receive funds, grants, and/or other contributions, if the donor or grantor, among other things, further directs that the funds be directed to the fiscally sponsored project, instead of-say, an existing and generally-established charity. A charitable project need not be a recognized charity, in order to receive fiscal sponsorship.
A fiscal sponsor can assist a charitable project by providing the type(s) of financial assistance, by extension, and reliability, to the project, that it may not otherwise be able to receive, provided that the fiscal sponsor (and any person performing work for the fiscal sponsor) complies with applicable law and its own policies ( e.g. – by establishing and enforcing proper internal controls and conflict of interest policies).

Key Components of a Fiscal Sponsorship Agreement

There is no statutory form for fiscal sponsorship agreements. However, a written agreement should contain at least these essential elements:
Description of the scope of work to be performed by each party
Financial arrangements for the fiscal sponsor’s service, including:
Amount of the donation that will go to the fiscal sponsor
Duration, in terms of time-limited or open-ended fiscal sponsorship
Ongoing management and accounting responsibilities
Responsibilities of the fiscal sponsor to each donor
Responsibilities of the fiscal sponsor to each grantee
Reporting requirements
Conflict of interest policy
Selection of an independent auditor
The following clauses are recommended:
Disclaimer of liability
Confidentiality
Termination
Indemnification
The National Council of Nonprofits Resource Library has sample fiscal sponsorship agreements.

Different Fiscal Sponsorship Models Explained

There are two basic fiscal sponsorship models. The comprehensive fiscal relationship is most commonly employed because it is generally preferable (and also, more difficult to get). However, the pre-approved grant relationship may be appropriate for organizations that are starting out with a limited amount of funds and/or are not yet prepared to fully structure the relationship. In either event, clear specifications on the relationship between the two entities to avoid any "unexpected" legal exposure are critical. General requirements with respect to fiscal sponsors include the following:
Comprehensive Fiscal Sponsorship
The comprehensive fiscal sponsorship relationship is usually transactional. The relationship between the organization and the fiscal sponsor is expressly defined and the fiscal sponsor exercises significant control over the organization. Transactions contemplated are typically defined by budget and timeframe. In other words, the fiscal sponsor agrees that certain behaviors will be governed by an agreement that is expected to be binding on both parties.
Pre-Approved Grant Relationship
Less formal than a comprehensive fiscal sponsorship relationship, the pre-approved grant relationship does not involve a binding contract and transactions between the parties do not have to be specified. However, the IRS requires that a pre-approved grant relationship be respected as such – the grantor must have a realistic expectation that the donee will eventually become (and be treated as) a 501(c)(3) tax-exempt charitable organization. The IRS has concluded in various private letter rulings that a pre-approved grant relationship exists if the grantor exercises control over the donee organization, including a requirement that grants from the grantor be distributed no more than one year after the grantor makes the contribution to the donee, a provision that the donee must dissolve or return funds without the permission of the grantor, and a requirement that the donee receive prior written approval from the grantor of its budget, use of funds, and/or grant program. Hence, while a pre-approved grant relationship is less contractual than a comprehensive fiscal sponsorship relationship, this model is not without significant limitations.
Notably, even if not required, fiscally sponsored organizations should have some form of written agreement to help ensure that substantive compliance with applicable legal requirements is met. Fortunately, the IRS permits 501(c)(3) organizations to employ the pre-approved grant model as long as at least one of the contracting entities is a 501(c)(3) organization. Hence, not having the fiscal sponsor as the only contracting entity may be helpful to a fiscal sponsor that desires to allocate significant fiduciary responsibility to another entity.

How to Create an Effective Template

Developing an effective template for a fiscal sponsorship agreement, however, is not just a matter of selecting the form that seems to provide the most comprehensive coverage. An effective template must be drafted specifically from the perspective of a top level fiscal sponsor, with consideration for center affiliate projects, stand-alone affiliates, and third-party sponsored projects, and for the ways in which each type may differ. In addition to the basic language required by the IRS, there are numerous considerations (listed below) that a responsible fiscal sponsor will incorporate into its form template to meet its own needs, as well as the needs of its constituent projects.
A fiscal sponsorship agreement template should, to the extent possible, be drafted in a way that will allow for customization without losing its main structural value. Many fiscal sponsors will have in place a list of standards for their projects of different types so that customization can be as simple as filling in a few blanks on the template form to create compliance and legally binding agreements. A good set of standards will be useful to both the fiscal sponsor and the sponsored organization. The fiscal sponsor will use the list to ensure that the delegate agreement is incorporating the most up-to-date provisions of importance to the fiscal sponsor , and the delegate will have a template that includes helpful requirements.
The following list is a compilation of standard clauses and provisions that should be considered for incorporation into a top level fiscal sponsorship template, as appropriate for the fiscal sponsor:
The process of maintaining an effective fiscal sponsorship system involves a review of the template on a regular basis. It is wise, then, to incorporate a provision in all fiscal sponsor agreements that allows the template to be updated as needed to retain compliance with IRS standards without requiring a specific reaction or approval by the sponsored organization. Caution should be used when changing the template, however, and any changes should be undertaken with special attention to the consequences to existing agreements.

Common Mistakes and How to Avoid Them

There are a number of common mistakes parties can make when creating their fiscal sponsorship agreement. The most serious mistake is the failure to actually have an agreement. While the IRS does not require a written agreement for a fiscal sponsorship, it is really in the best interests of the parties to have a written contract. An unsigned fiscal sponsorship agreement leaves the parties vulnerable to confusion and misinterpretation.
Another common pitfall is not thoroughly covering funder relationship with the fiscal sponsor. Sponsors should include a list of the funders’ responsibilities and the information they expect to receive from funders, as well as when, where, and how it will be delivered. Likewise, sponsors should include a list of the obligations the funders must complete to receive funds, including accounting basics and specific documentation for donors to comply with IRS rules.
It is also common for parties to forget to have a long-term agreement with a duration of more than a year. Here too it is important to remember that while the IRS does not require a 501(c)(3) organization to have a written agreement if it is not going to use its status as a fiscal sponsor, it is really in the best interests of all parties to hammer out the details.

Agreement Resources and Tools

There is a wealth of resources available to assist with fiscal sponsorship agreements. For those seeking to build their own, several legal software tools can offer templates and guidance. One option is to obtain a sample agreement via the Alliance of Arizona Nonprofits, which provides a detailed checklist of policy, legal, and management best practices for Arizona nonprofits. Each of these components includes a link to sample templates available on the Alliance website. Likewise , the National Council of Nonprofits has maintained an online library of resources on nonprofit fiscal sponsorship, including a sample set of fiscal sponsorship policies and procedures. Professional associations such as the Nonprofit Risk Management Center and the Society for Nonprofits also provide guidance on developing fiscal sponsorship agreements. They note, however, that a template will never be a substitute for legal counsel. Resources are now widely available to guides organizations through best practices in this process.