As an entrepreneur seeking funding for your venture, you know that securing the right fiscal sponsorship agreement is critical to unlocking investment and grants. Yet navigating the legal complexities of these arrangements can be daunting. This comprehensive, step-by-step guide equips you with the knowledge and tools to set up a fiscal sponsorship tailored to your unique needs. Walk through the key decisions from choosing the right sponsor to negotiating contract terms. With sample agreements, compliance checklists, and expert tips, you'll gain the clarity and confidence to establish a fiscal sponsorship that sets your business up for funding success. Master the intricacies of fiscal sponsorship and accelerate your entrepreneurial dreams with this practical resource.
What Is a Fiscal Sponsorship and How Does It Work?
A fiscal sponsorship is a contractual agreement between a nonprofit organization, known as the fiscal sponsor, and a project (usually run by a for-profit organization, entrepreneur, filmmaker, or creative artist), known as the sponsored project. The fiscal sponsor assumes legal and financial responsibility for the sponsored project, receiving charitable contributions and grants on its behalf and providing administrative and financial oversight.
The most important key to this fusion of nonprofit and for-profit collaboration is that the project must further the nonprofit's mission.
What does this mean?
For a fiscal sponsorship arrangement to be legitimate, the sponsored project's activities must align with and advance the sponsoring nonprofit's tax-exempt purpose. This means the project's goals, programs and services should generally relate to the nonprofit's designated cause area.
For example, a nonprofit environmental organization would likely sponsor a project focused on environmental conservation, education, or activism. However, it would be inappropriate for that same nonprofit to sponsor a for-profit bakery or consulting firm whose work is unrelated to environmental issues.
To evaluate mission alignment, nonprofits typically review the sponsored project's:
Stated purpose and goals
Strategic plan
Activities and programs
Services offered
Target audience or beneficiaries
If a project's mission and operations sufficiently relate to the nonprofit sponsor's cause, the arrangement can proceed. However, nonprofits should still ensure proper separation between themselves and the sponsored projects to maintain their tax-exempt status.
Project Independence
Under a fiscal sponsorship agreement, the sponsored project operates independently from the fiscal sponsor in its daily activities and management. The sponsored project retains control over its creative works and intellectual property. The fiscal sponsor does not control or limit the sponsored project's programs or activities. However, the sponsored project must operate consistently with the fiscal sponsor's tax-exempt purpose.
Tax-Exempt Status
As a tax-exempt entity, the fiscal sponsor can receive tax-deductible charitable contributions and apply for grants on behalf of the sponsored project. Donors and grantmakers can support innovative projects that may not yet have their own nonprofit status. The fiscal sponsor ensures all funds are used for tax-exempt purposes.
Administrative Support
The fiscal sponsor provides administrative support, including financial management, record-keeping, and reporting. It receives and disburses funds, issues receipts to donors, and maintains financial records on the sponsored project's behalf. At the end of the year, the fiscal sponsor includes the sponsored project's financial activities in its annual reporting and audit.
A fiscal sponsorship allows you to launch or operate your project while gaining the benefits of the sponsor's tax-exempt status and administrative infrastructure. With the right sponsor and well-drafted agreement, it can be an excellent way for new projects to secure funding and establish themselves. The key is finding a sponsor willing to support your project's mission and work with you to achieve your goals.
Why is an Experienced Lawyer Essential for Fiscal Sponsorship Success?
First and foremost, we should get an important point out of the way. A fiscal sponsorship is a very complicated legal relationship. This requires expert legal counsel to properly establish and maintain. An experienced fiscal sponsorship lawyer can:
Draft agreements that clearly outline roles, responsibilities, and limitations to minimize risks for both parties.
Negotiate terms that protect intellectual property rights for the sponsored project.
Ensure compliance with IRS rules to maintain the sponsor's tax-exempt status.
Advise on governance structures that maintain project independence while meeting the sponsor's oversight needs.
A well-designed fiscal sponsorship requires careful thought, planning, and legal expertise. An experienced lawyer can guide you through:
Determining what type of legal relationship best meets your needs
Crafting agreements that balance organizational control with project autonomy
Structuring the financial flows to maximize benefits while minimizing risks and taxes
Implementing proper governance and oversight procedures that work for both parties
So, (you may be asking yourself) what kind of attorney is best for a fiscal sponsorship? In our opinion, you should look for an attorney who has at least some experience with intellectual property law, nonprofits, and tax law. Additionally, fiscal sponsorship is a legally complex arrangement with many potential pitfalls, so naturally, your fiscal sponsorship attorney needs to have extensive contract drafting, negotiations, and administration experience. Lastly, you want an attorney who hopefully has extensive experience dealing with complex organizational structures and helping organizations scale.
So, if you're considering a fiscal sponsorship, engaging expert legal counsel from the beginning is essential to avoiding common problems and setting your sponsored project up for success. At Lopes Law, our team has extensive experience in all of the above areas, as well as specific experience with creating, drafting, and administering fiscal sponsorships. We can help ensure your agreement stands up to legal scrutiny while achieving your funding goals.
Continue reading to get more information on how to prepare yourself for fiscal sponsorship success, or go ahead and contact us for a FREE fiscal sponsorship consultation today.
Legal Compliance
Securing funding through fiscal sponsorships requires navigating complex legal frameworks. As an entrepreneur focused on your creative work, you likely lack expertise in areas like tax law, nonprofit regulations, and contract negotiations. An experienced lawyer can ensure your agreement meets all legal requirements, protecting you and your sponsor from potential issues down the road.
Contract Negotiation
Fiscal sponsorship agreements define the terms of your relationship and funding. A lawyer can negotiate provisions in your favor and draft an agreement that establishes clear responsibilities and expectations for both parties. Their objectivity and legal knowledge prevent you from agreeing to unfavorable terms out of eagerness to secure funding. With their guidance, you can feel confident you have an agreement that sets your project up for success.
Tax Planning
How funding flows through a fiscal sponsorship directly impacts your tax liability. A lawyer can determine the optimal structure for your needs and ensure tax payments are properly handled. Their expertise prevents tax issues that could compromise your project’s finances or integrity.
Protecting Your Vision
As an entrepreneur, you have a vision for your project that fuels your work. While fiscal sponsorships make funding possible, they also give sponsors a degree of control. An experienced lawyer can negotiate for provisions protecting your artistic freedom and integrity. With the right agreement, you gain financial support without sacrificing the heart of your project.
In summary, an experienced lawyer is essential to fiscal sponsorship success. Their guidance ensures your agreement meets legal requirements, establishes favorable terms, handles taxes properly, and protects your vision. With their expertise, you can focus on your creative work knowing the legal and financial foundations of your project are secure.
Step 1: Choosing the Right Fiscal Sponsor: A Critical First Step for Your Project
Evaluate Potential Fiscal Sponsors Thoroughly
When selecting a fiscal sponsor, conduct extensive research on potential organizations. Review their mission and values to ensure strong alignment with your project’s goals. Examine their experience and track record of success in sponsoring similar initiatives. The ideal fiscal sponsor will have expertise relevant to your field and a proven history of compliance with all legal and regulatory requirements. They should also share your commitment to accountability, transparency and impact.
Assess Their Capacity and Competency
Determine if the fiscal sponsor has adequate resources and expertise to provide proper oversight and guidance for your project. They must demonstrate proficiency in key areas like financial management, reporting, compliance and governance. Ask about their internal controls, accounting systems, and auditing procedures to confirm they meet high standards for fiscal responsibility. Review their current portfolio of sponsored projects to confirm they have capacity to take on another initiative.
Evaluate Costs and Fees
Fiscal sponsor fees typically range from 5% to 15% of funds raised to cover administrative costs. Compare fees across potential sponsors to determine what is reasonable and customary. While lower fees may seem appealing, higher fees may come with more substantial support services. Consider the overall value received for fees charged to find the right balance of cost and benefit. Ensure all fees and any hidden costs are transparent before entering into an agreement.
Confirm Alignment on Key Terms
Discuss expectations around budgeting, reporting, ownership of assets, intellectual property rights, and other key terms with potential fiscal sponsors. Look for an organization willing to negotiate terms that protect the interests of both parties. The ideal fiscal sponsor will maintain an appropriate level of oversight while respecting your autonomy and vision. With open communication and reasonable compromise, you can establish a productive partnership built on trust and shared values.
In summary, take time to evaluate potential fiscal sponsors thoroughly. Choosing a sponsor with a strong mission fit, expertise, resources, reasonable fees, and a collaborative approach will set your project up for success. With the right sponsor in place, you can focus your efforts on execution while benefiting from guidance and support.
Step 2: How to Draft a Comprehensive Fiscal Sponsorship Agreement
A fiscal sponsorship agreement establishes the legal relationship between your project and the sponsoring organization. It is critical that this agreement clearly outlines each party’s responsibilities and obligations to avoid misunderstandings. To draft an effective fiscal sponsorship agreement, you must include key provisions that protect all parties involved.
Define the Scope of Services
Specify the exact services the fiscal sponsor will provide, such as receiving and administering funds on your behalf. Clearly state any restrictions on how funds can be used. For example, funds received for a particular project can only be used for expenses related to that project. Define how funds will be distributed and the frequency of distributions.
Establish Reporting Requirements
Detail any financial, programmatic or evaluation reporting required, including frequency and metrics. Reporting requirements should align with any funding restrictions to demonstrate funds were used appropriately. Require regular meetings between parties to review reports and address any issues.
Determine Ownership of Assets
Specify which party will own any assets purchased using funds under the fiscal sponsorship agreement. Typically, assets will be owned by the fiscal sponsor unless or until the project establishes its own tax-exempt status. However, you can negotiate ownership of certain assets, especially intellectual property.
Allow for Termination
Include provisions allowing either party to terminate the agreement with advance notice, typically 30 to 90 days. Specify required actions upon termination, such as transferring any remaining funds or assets to your nonprofit or another fiscal sponsor. Termination clauses protect both parties in the event the relationship does not work out as intended.
Fees
Detail any fees the fiscal sponsor will charge for their services, such as an administrative fee deducted from funds received or a flat annual fee. Fees should be reasonable and consistent with the level of services provided. All fees and fee schedules must be explicitly outlined in the agreement.
Following these guidelines will help you draft a comprehensive fiscal sponsorship agreement that protects your interests and sets the relationship up for success. Be sure to have the agreement reviewed by legal counsel before signing to identify any other provisions that should be included based on the unique aspects of your project. A well-crafted agreement is the foundation for an effective fiscal sponsorship.
Step 3: Setting Up Accounting and Financial Controls for Fiscal Sponsorship Success
Establishing Separate Accounts
To ensure proper accounting of funds, you and your fiscal sponsor should set up separate bank accounts specifically for your project. The sponsor will maintain control of the accounts but grant you access to review statements and authorize payments related to your project’s expenses. Strict controls and oversight of these accounts are necessary to demonstrate the appropriate use of funds to stakeholders and comply with relevant laws.
Developing an Accounting System
An accounting system with checks and balances in place is key. Work with your fiscal sponsor to determine the level of detail needed for record-keeping and reporting based on the requirements of your funding sources. A system should be implemented to properly account for and track income, expenses, budgets, cash flow, assets, and liabilities. Regular financial reports generated from this system will provide visibility into your project’s financial health and ensure all parties remain informed.
Conducting Audits
Independent audits by a certified public accountant (CPA) provide an objective assessment of your project’s finances and accounting practices. They confirm funds are used properly and in compliance with applicable rules. Requirements for audits depend on factors like the amounts and sources of funding. It is best to discuss audit needs with your fiscal sponsor and determine a schedule to conduct audits routinely. Addressing any issues identified will only strengthen the fiscal sponsorship arrangement.
Maintaining Transparency
Transparency is key to a successful fiscal sponsorship. You and your fiscal sponsor should commit to open communication and information sharing. Providing stakeholders access to accounting records, financial reports, audits, budgets, and other financial documentation builds trust in the fiscal sponsorship. Transparency also aids in monitoring for and quickly detecting any inappropriate use of funds. Overall, maintaining transparency leads to a healthier, longer-lasting fiscal sponsorship.
With diligent oversight, strong controls, and a commitment to transparency on financial matters, you and your fiscal sponsor can nurture a mutually beneficial fiscal sponsorship. Robust accounting practices will set your project up for funding and ensure its longevity.
Step 4: Maximizing Your Project’s Potential: Accepting Tax-Deductible Donations and Grants
To ensure your fiscal sponsorship agreement yields the maximum benefits, you must establish procedures to accept tax-deductible donations and apply for grants.
Accepting Tax-Deductible Donations
As a sponsored project, donations made to support your work are tax-deductible for the donors. You should work with your fiscal sponsor to set up a donation page on their website and develop marketing materials promoting the opportunity for tax-deductible giving. Provide details on how funds will be used to further your mission and impact. Offer multiple donation levels and consider offering small gifts to show your appreciation for contributions. Be sure donors receive prompt acknowledgment of their gifts for tax reporting purposes.
Pursuing Grants
Grants provide an excellent source of funding for sponsored projects. Work with your fiscal sponsor’s grant writing team to identify grants you may be eligible for and provide any details needed for the applications. Some grants may require the sponsored project to submit a separate statement of work or budget. Be prepared to gather the necessary details to respond to funders’ questions or reporting requirements. Review and provide feedback on draft grant proposals to ensure the project is accurately represented.
Building a base of financial support through tax-deductible donations and grants will provide stability for your sponsored project. Work closely with your fiscal sponsor to maximize the opportunities for funding and comply with all legal requirements. A successful fiscal sponsorship agreement depends on open communication and teamwork to achieve your shared goals. With diligence and collaboration, you can access resources to help your important work thrive.
Step 5: Protecting Your Project: Ensuring Compliance and Safeguarding Your Reputation
Once you have established your fiscal sponsorship agreement, it is critical to implement prudent policies and procedures to ensure ongoing compliance with all legal and regulatory requirements. Failure to do so could jeopardize your project’s reputation and funding.
Establish Rigorous Financial Controls
Strict financial controls, including segregation of duties, must be established to prevent fraud and abuse. No single individual should have sole control or authority over your project’s finances or accounting records. Multiple signatories should be required for all withdrawals and fund disbursements. Regularly monitor revenue and expenses against your budget to identify and address any discrepancies quickly.
Maintain Accurate Records
Your fiscal sponsor will require detailed records of all donations, grants, and expenditures to satisfy IRS reporting requirements. Maintain meticulous records of contributions, including the donor’s identity and the date and amount of each gift. Issue receipts for all donations and keep copies of receipts on file. Retain records of expenditures, invoices, bills, and any other documents related to how funds were used. These records must be made available for review if requested by your fiscal sponsor or relevant regulatory agencies.
Conduct Routine Compliance Reviews
Schedule periodic reviews to confirm ongoing compliance with the terms of your fiscal sponsorship agreement as well as relevant laws and regulations. Check that funds are being used in a manner consistent with donor intent and that your fiscal sponsor's policies are being followed. Review financial and accounting records for accuracy and completeness. Make any necessary changes to policies, procedures, or internal controls to address deficiencies or areas of improvement identified during the review process.
Protect Your Reputation
Once established, your project's reputation is one of its most valuable assets. Be transparent in communicating with donors and the public about how funds are used to further your mission. Address any complaints or criticisms promptly and professionally. Uphold high ethical standards in all of your operations and activities. Your fiscal sponsor's reputation is also tied to the success and integrity of the projects it sponsors, so maintaining an excellent reputation is mutually beneficial.
In summary, fiscal sponsorship agreements provide opportunities for impact but also responsibilities. Diligent compliance and prudent policies will help safeguard your project and reputation over the long term. With time and experience, managing these requirements will become second nature, allowing you to focus on achieving your mission.
Step 6: Planning for Success: Transitioning Smoothly After Your Fiscal Sponsorship Ends
Once the purpose of the fiscal sponsorship has been fulfilled and the project has matured, terminating the fiscal sponsorship agreement and transitioning to independence is critical. To ensure a seamless transition, meticulous planning, and preparation are paramount.
First, determine if the project is financially and operationally ready to function independently. Review financial statements to confirm sufficient capital and revenue to sustain operations. Evaluate if the organization has the proper internal controls, accounting systems, and administrative infrastructure in place. If weaknesses exist, work with the fiscal sponsor to develop a transition plan to build capacity before ending the agreement.
Next, establish a timeline for terminating the agreement and transitioning to independence. Meet with the fiscal sponsor to decide on a mutually agreeable end date. Then map out key milestones to hit before the termination date like establishing your tax-exempt status, setting up financial accounts, and updating legal documents. Make sure to build buffer periods in case of unexpected delays.
Subsequently, set up essential legal and financial frameworks. Apply for tax-exempt status from the IRS, open business bank accounts, and establish financial policies and controls. Review and revise governance documents like articles of incorporation and bylaws. Make certain all documentation properly reflects your new independent status.
Finally, don't overlook logistical details. Update websites, email signatures, marketing materials, and stationery with your independent organization's information. Notify all funders, donors, partners, and key stakeholders about the transition. Be transparent about how the change in status may or may not impact them.
With meticulous planning and preparation, terminating a fiscal sponsorship agreement and transitioning to independence can be achieved seamlessly. But don't hesitate to call on your fiscal sponsor for guidance and support if needed. A smooth transition helps ensure your organization's success and sustainability for years to come.
How to Properly Create a Fiscal Sponsorship Step-by-Step
To establish a fiscal sponsorship agreement, you must follow the proper steps to ensure compliance and set your project up for success.
First, locate a nonprofit organization willing to serve as your fiscal sponsor. Research to find sponsors with experience in your field that share your values and mission. Carefully review their sponsorship terms and fees to find the best fit.
Next, draft a letter of intent or proposal outlining your project details, needs, and goals. Explain how the sponsorship will benefit both parties. If interested, the sponsor will review and either accept or propose amendments to the agreement.
Then, work with the sponsor to create a formal sponsorship agreement. This legally binding document should specify the responsibilities and obligations of each party. It must state that the sponsor maintains full control and discretion over the use of funds. The agreement should also detail the sponsorship fee and any revenue sharing. Have an attorney review the document before signing to safeguard your interests.
After signing the agreement, submit grant proposals and fundraising campaigns in the sponsor's name. All donations and funds raised are the property of the sponsor, who then grants money to your project per the agreement. The sponsor is responsible for managing funds and maintaining records to meet legal requirements. You must provide regular reports to show fund use and project progress.
To properly administer the sponsorship, follow all terms of the agreement and be transparent in communication. Keep detailed records of your project's income, expenses, outcomes, and impact to share with your sponsor. Renew or amend the agreement as needed to account for any changes. With diligence, fiscal sponsorships can provide tremendous benefits, allowing you to receive donations and grants so you can focus on your important work. By establishing a collaborative partnership built on trust and understanding, your sponsor can empower your project's success.
Fiscal Sponsorship Agreement FAQs: Your Top Questions Answered
Entering into a fiscal sponsorship arrangement requires careful consideration of legal and financial factors. It is natural to have questions about the details and implications of such an agreement. We have compiled answers to some of the most frequently asked questions to provide you with guidance.
What are the responsibilities and liabilities of the sponsoring organization?
The sponsor assumes legal and financial responsibility for the sponsored project. They receive and administer funds on behalf of the project and ensure proper accounting and reporting. The sponsor is liable for any legal or tax issues that may arise. For this reason, it is critical to choose a sponsor with expertise and experience in fiscal sponsorship.
What are the reporting requirements?
Sponsors are required to provide regular financial reports on the sponsored project's income, expenses, and fund balances. The specific requirements depend on the sponsor and funding sources. Common reports include income statements, balance sheets, budget vs. actuals, and funder reports. The sponsored project should work closely with the sponsor to understand all reporting obligations.
Can the agreement be terminated?
Yes, either party may terminate the fiscal sponsorship agreement with proper notice, typically 30 to 90 days. Upon termination, the sponsor will transfer any remaining funds or assets to another nonprofit organization chosen by the sponsored project. It is advisable to include provisions for termination and fund distribution in the initial agreement.
Are there any costs to the sponsored project?
Most sponsors charge an administrative fee, typically 5-15% of funds raised, to cover the costs of providing sponsorship services. The fee percentage and payment terms should be negotiated upfront and included in the fiscal sponsorship agreement. Some sponsors may also charge set-up fees or pass-through costs. Make sure you understand all potential costs before finalizing the agreement.
Does the sponsor control the project's activities?
No, the sponsor should not control or influence the project's programs and activities. The sponsor's role is to provide administrative and financial oversight, not management or governance. The sponsored project maintains control over its operations while benefitting from the sponsor's nonprofit status and support services. The fiscal sponsorship agreement should clearly establish the independent nature of the relationship.
In summary, fiscal sponsorship allows you to advance your project's mission by providing nonprofit status and financial oversight. However, it also brings legal and reporting responsibilities that require due diligence. With a well-crafted agreement and trusted sponsor relationship, fiscal sponsorship can be an effective way for new nonprofit initiatives and programs to operate and raise funds.
Conclusion
As you have hopefully understood by reading this blog post, setting up a fiscal sponsorship agreement requires careful planning and diligence. By taking the time to find the right sponsor, negotiate favorable terms, and formalize the relationship through a written agreement, you can position your venture for funding success. With a thoughtful approach, strong partnerships, and expert legal guidance, your innovative project can access the resources it needs to achieve impact. Though the process involves effort, the payoff of fueling your entrepreneurial vision makes it worthwhile. Stay focused on your mission, and let this guide chart the path to structuring your fiscal sponsorship strategically.
In summary, fiscal sponsorship can be a great way for your project to gain non-profit status and receive funding. However, to do it right you'll need expert legal guidance every step of the way. An experienced attorney familiar with nonprofits, tax law, and complex agreements can help you navigate this process successfully.
So if you're thinking of pursuing a fiscal sponsorship for your project, the next step is to find the right lawyer to advise and represent you. Look for an attorney with a proven track record of working with nonprofits and handling complex legal agreements. Then have an initial consultation to discuss your specific goals and needs to determine if a fiscal sponsorship is the best path forward.
With the right legal counsel on your side, a fiscal sponsorship has the potential to help your project grow and thrive for years to come. So give some serious thought to securing experienced nonprofit and tax law representation before formally pursuing a sponsorship arrangement. The upfront investment of attorney fees will likely pay for itself many times over in the benefits a properly structured sponsorship can provide.
Why Choose Lopes Law for Your Fiscal Sponsorship
Lopes Law empowers entrepreneurs by simplifying fiscal sponsorship legalities. We're here to guide you through securing funding, ensuring compliance, and protecting your project or venture's integrity. We can help negotiate and draft fiscal sponsorship agreements. We can also help with tax planning and structures for fiscal sponsorship agreements. Our expertise turns your focus back to what you do best: creating and innovating.
Lopes Law offers comprehensive legal services tailored to the unique needs of entrepreneurs, producers, filmmakers, and creative artists pursuing fiscal sponsorship. Our offerings include: navigating the application process for fiscal sponsorship, drafting and negotiating sponsorship agreements to protect your interests and ensure legal compliance, advising on the management of received funds to align with both sponsor and regulatory requirements, and providing ongoing support to address any legal challenges that arise during the project lifecycle. We also assist in establishing clear communication channels between you and your fiscal sponsor, ensuring transparency and accountability. With Lopes Law, you gain not only legal expertise but also a committed partner who understands the importance of your creative and entrepreneurial endeavors, ensuring your project not only launches but thrives.
If you need professional legal assistance, please contact us. We're here to help.