What is Fiscal Sponsorship?: The Ultimate Guide for Charitable Programs

According to the primary legal book on fiscal sponsorship (Fiscal Sponsorship: Six Ways to do it Right), there are actually six different models of fiscal sponsorship. But for the purposes of this article, we’ll cover the two most common types: models A, and C. For both types, we’ll cover:

• What makes the model unique
• How charitable dollars flow through this model
• Pros and cons of this type
• Average cost
• A real world example of how it could be used

What is Model A Fiscal Sponsorship?

Model A fiscal sponsorship is the most integrated version of fiscal sponsorship: it allows a charitable program to fully be part of an existing 501c3 organization. In other words, your charitable program is not its own legal entity, it is part of the sponsor’s entity. Model A is the only type of fiscal sponsorship that does not require you to have a legal entity created to house your charitable project, and in fact, would require that you don’t. Essentially the charitable program is like any other activity the sponsor does. In this arrangement, the sponsor has the highest level of involvement in the day-to-day operations of the project. The work done by the project is owned by the sponsor because it is legally no different than if the sponsor had done the work.

How does this play out in reality? Let’s say a group providing books to kids in rural communities is fiscally sponsored by Sponsor X. When the book program wants to pay staff, those staff legally work for Sponsor X because the book program isn’t its own legal entity, so it cannot be an employer. The book program will need to operate within the same systems and administrative practices required by Sponsor X because Sponsor X will handle many administrative duties. If Sponsor X has HR practices or insurance that the book program doesn’t like or feel are sufficient, they typically cannot change them.

Or let’s say the book program wants to enter into a contract with someone who will build a website for the program. Sponsor X would actually be the named party on the contract, and would need to review and sign off on it. The website provider would be a vendor of Sponsor X who is paid by Sponsor X. If Sponsor X does not find the terms reasonable, they can decide to not enter into the contract or terminate it.

The 990s are filed by Sponsor X, as are payroll tax returns and any other filings related to the book program. Sponsor X takes liability for the book program fully, and secures insurance to cover those activities. Overall, the program is part of the sponsor’s organization in Model A. It’s heavily integrated, so the program has less independence, but often gets more services as a tradeoff. Because it is heavily intertwined, this model tends to be the most difficult to untangle if the sponsee ever wants to become its own 501c3 nonprofit organization.

How does funding work in Model A?

In Model A, donations and grants go directly to the fiscal sponsor. The fiscal sponsor then has full discretion over how charitable funds are used and takes full responsibility for grant reporting, donation receipts, and other fundraising compliance needed like Charitable Solicitation Registration. The responsibility of accounting for all incoming and outgoing funds also rests solely on the sponsor. Raising funds is often the responsibility of the project, though some Model A fiscal sponsors offer help with grant writing or fundraising for a fee.

When expenses need to be paid, the sponsor pays for those expenses directly. The sponsor will likely track donations that are intended to support their fiscally sponsored programs, but they are not required to have a separate bank account for the project. 

Pros and Cons of Model A Fiscal Sponsorship

Model A includes all the normal FS benefits mentioned above and the added benefits of:

• The highest level of administrative support
• The highest level of accounting support
• Lowest amount of liability for the project

Its primary benefit is also its biggest drawback. With more support comes less independence. Common downsides of Model A include:

• Lowest level of independence
• Highest costs
• Most difficulty becoming a 501c3

What does Model A Fiscal Sponsorship Typically Cost?

Model A is usually the most expensive of the types of fiscal sponsorship, with most fiscal sponsors charging between 8-15% of donations brought in. 

Example of Model A

A common example of this type happens in the ministry/church space regularly. If a congregant of a church wants to launch a new ministry, sometimes the church will act as a Model A fiscal sponsor of that ministry. Let’s say our ministry launcher already has a full time job and this ministry will simply be a weekend project for them. The congregant isn’t forced to create a legal entity and the ministry acts as a program of the church itself. 

The ministry gains the benefits of the church’s HR and admin staff performing their functions for the ministry, and the church may even help the ministry recruit volunteers or donors by speaking about them on Sundays. The ministry can fundraise for their cause and those working on the ministry get paid as part-time employees or contractors of the church. This situation can work beautifully for programs that might not want to take on the administrative burden of having an independent organization, but still want to engage in meaningful work.

Is Model A fiscal sponsorship right for me?

Each situation is unique, but there are a few scenarios where it’s common to benefit from Model A fiscal sponsorship. Here are a few examples:

1. If you’re trialing out a new charitable program and need administrative support to get it up and running.
2. If you want to raise funds and operate a charitable program without the compliance paperwork, and you want the benefit of being associated with an established nonprofit.
3. If you are an individual like a musician or artist who wants to do charitable work, but is interested in keeping it a solo venture rather than a full scale organization.
4. You want a fiscal sponsor with an in-house team that can handle functions like HR, payroll, and accounting for you.

Each fiscal sponsor has requirements for the programs they fiscally sponsor. In Model A fiscal sponsors, the program often needs to match closely with the mission of the sponsor. For example, a sponsor might only select programs in their city or programs that serve a certain population.  

What is Model C fiscal sponsorship?

On the other hand, Model C fiscal sponsorship involves two distinct legal entities: the sponsor and the project, who have different roles and responsibilities that more closely resemble a grant provider and a grant receiver. In fact, Model C is often called a “pre-approved grantor/grantee relationship” because of this similarity. In this model, the sponsor acts like a grant provider by disbursing funds to the sponsored project. The sponsored project is usually then responsible for providing information related to how the funds were used so the sponsor can ensure donated dollars and grants are being spent on the permissible charitable purpose. In these arrangements, usually work done by the project is owned by the project, rather than the sponsor.

How does this look in the day-to-day? For example, let’s say a dentist wants to be able to run a mobile clinic to provide free dental care to the elderly in her area. She already owns a for-profit dental clinic, but wants to be able to operate this small clinic charitably as well, and take a few donations to cover gas for the mobile clinic, a dental hygienist’s time, and free toothbrushes for these elderly patients. Sponsor Z agrees to fiscally sponsor just her mobile clinic, which is part of her for-profit practice. 

In Model A, integration was high and independence was low, but in Model C, independence increases and integration decreases. When our dentist applies for grants, she still applies in Sponsor Z’s name. But when the funds arrive, the dental hygienist working for the mobile clinic can still be an employee of the practice, rather than of Sponsor Z. The dentist can manage the HR and administrative functions however she would like, as long as they are legal. She spends charitable funds on her expenses for the mobile clinic and provides receipts and reporting to Sponsor Z, showing that the purchases were for the mobile clinic, rather than her private practice. The dentist chooses and holds her own insurance for the clinic. Sponsor Z still sends out donation receipts and can choose to take granted funds back if they find the dentist isn’t using them for charitable purposes. The dentist has control over what vendors she uses, her admin and HR practices, who does her accounting, etc. Sponsor Z still has ultimate control over the funds, but provides more freedom to the dentist to operate the program how she’d like.

How does funding work in Model C?

In Model C, donations and grants go to the sponsor, who then is able to issue grants or microgrants to sponsees. The sponsor still takes care of big pieces of the compliance puzzle– like issuing donation receipts and maintaining fundraising registrations in the states it’s needed. The sponsee is then responsible for spending funds charitably and reporting information about that back to the sponsor. If the sponsee does not provide adequate reporting to the fiscal sponsor that funds are spent charitably, the sponsor would stop grants to that sponsee until reporting requirements are met. Each Model C fiscal sponsor sets their own requirements and timing for reporting. 

Unlike Model A, Model C fiscal sponsors often have separate accounts for each fiscally sponsored project that are usually sub accounts of the sponsor’s bank account.  Fundraising is usually the responsibility of the project. Often, projects can raise funds through sponsor-approved methods like online donation pages, grants, donor-advised funds, etc.

Pros and Cons of Model C Fiscal Sponsorship

Model C includes all the normal FS benefits mentioned in the original benefits section plus:

• Highest level of independence and ownership
• Easiest transition to becoming a 501c3 organization
• Lowest costs

Its primary benefit is also its biggest drawback. With more support comes less independence. Common downsides of Model A include:

• Lower level of administrative services
• Lower level of accounting support
• Higher liability if insurance is not procured

What does Model C Fiscal Sponsorship Typically Cost?

Model C is typically more cost-effective, with most sponsors charging between 5-10% of incoming donations and grants. We’ve created a comparison piece that walks you through some of the largest Model C fiscal sponsors and their rates here.

Example of Model C

One common example of model C fiscal sponsorship exists in the art world. Let’s say an arts program is just getting started. They don’t have their own 501c3 status yet, but they’d like to have it someday when their funding sources are more stable to support a few staff. Until then, they operate as a sponsee of an arts foundation. The arts foundation is able to provide them with the ability to raise tax deductible donations before getting 501c3 status of their own, while granting them the freedom to build up the program how they see fit. 

The arts program operates as a nonprofit at the state level, setting them up to be able to apply for 501c3 status when they’re ready. They can choose their own processes, software, vendors, and more. The foundation requires the arts program to submit receipts for the expenses they incur for the program like paint supplies, contracted art teachers, and space rental. The foundation keeps records of those expense to ensure they are charitable and provides donors with tax deductible receipts. The program can fundraise and works with the foundation to apply for grants. The foundation has peace of mind that funds are being spent charitably and the program gets to “test out” their idea to see if it can get stable funding without having to go through the process to register to fundraise in all 50 states and complete the 1023 application to the IRS for 501c3 status. 

Once the arts program has a base of donors, corporate funders and grants, they go and apply for their own 501c3 status and get their compliance paperwork in order. Even during that process, they can raise funds tax deductibly through the fiscal sponsorship. And when their ducks are in order, the foundation provides one last grant of all of the funds raised to the arts program. 

Is Model C fiscal sponsorship right for me?

If you’re wondering about if this type is right for your organization, here are a few examples where Model C fiscal sponsorship is common:

1. New charitable program wanting to raise donations prior to applying for 501c3 status
2. A for-profit organization looking to do charitable work on the side
3. Short-term or one-time charitable events or programs that don’t want to operate and upkeep year-round (like one-time disaster relief or an annual Christmas program) 
4. New nonprofits waiting for a determination letter from the IRS, who need to accept tax deductible donations and grants immediately
5. 501(c)(3) organizations that don’t have enough years of financial history to provide to a grant provider who requires it
6. 501(c)(3) organizations who have lost their tax exempt status and are going through the reinstatement process currently or in the future

Each fiscal sponsor has discretion over the type of programs they choose. Not every sponsor accepts short-term projects or charitable programs of for-profit organizations. Check the application requirements to learn about what the sponsor you’re interested in will accept.

Model A vs Model C Fiscal Sponsorship

Comparing Model A and Model C? Here’s a quick chart to see the differences, benefits, and drawbacks side-by-side: