The Advantages of Model B Fiscal Sponsorship: Empowering Fiscal Sponsors for Effective Oversight at Scale
Fiscal sponsorship is crucial in supporting charitable projects and initiatives by providing them with tax-exempt status and administrative support. Different fiscal sponsorship models exist, each with its unique characteristics and benefits. This article will focus on the advantages of model B fiscal sponsorship and explore its advantages over Models A and C from the perspective of the fiscal sponsor.
Specifically, it will highlight the challenges associated with extreme control and discretion in Model A and the operational complexities of trying to show control and discretion via regranting in Model C. Furthermore, it will demonstrate how Model B strikes a balance, allowing fiscal sponsors to exercise appropriate oversight while minimizing operational burdens.
Please note that the examples used below illustrate some of the worst-case scenarios of fiscal sponsorship and should not be assumed to be standard; however, in our view, it is important to enter into fiscal sponsorship with a realistic understanding of how these relationships can go badly. I want to believe that fiscal sponsorship is always perfect, but just like most relationships, things can go very, very badly.
In the document below, I try to weigh the operational and financial factors that can help drive decision paths for sponsors.
Extreme Control and Discretion in Model A;
Operational Complexity is a Nightmare at Scale
Model A fiscal sponsorship is characterized by extreme control and discretion provisions, granting the fiscal sponsor extensive authority over the sponsored project’s funds and operations. While this level of control aims to ensure compliance and responsible use of funds, it can lead to unintended consequences. One significant challenge is the potential operational liability faced by the fiscal sponsor.
The fiscal sponsor takes on greater legal and financial responsibility by assuming control over the funds and project. Any mismanagement or misuse of funds by the sponsored project could expose the fiscal sponsor to legal ramifications and damage its reputation. This includes, but isn’t limited to:
- An ever-growing insurance policy to cover increasingly diverse projects of the sponsor’s programs
- Hiring employees of projects directly creates managerial complexity
- Activities carried out by these project employees can create extreme liability for the project
While the first two issues noted above can be handled via increased fees for sponsorship and may be the right answer if the sponsored project is thought of as a true subsidiary of the sponsor, for example, this may be the case if a local group is truly a “chapter” of the parent and they are true employees with the best interests of the sponsoring organization at heart. The last issue noted above can create “existential EIN risk,” meaning that a program employee’s actions can trigger an IRS audit for the sponsor and potential loss of charitable status.
For most sponsors who do this to support another’s charitable purpose, this should be unacceptable and there is no price that they should accept to take on this risk. This is most common when a sponsor operates under Model A, but the programs are related but not a true subsidiary of the parent organization. Think of an addiction recovery project operating under a homelessness-focused nonprofit. While these groups can serve the same general mission, they are distinct and should be legally separate to protect the EIN of the sponsor.
These reasons, and more, can deter potential fiscal sponsors from engaging in Model A relationships, as the risks may outweigh the benefits of providing support, regardless of the revenue generated.
Operational Complexity in Model C;
An Effort to Show Control and Discretion
In contrast to Model A, Model C fiscal sponsorship establishes a regranting relationship between the fiscal sponsor and the sponsored project. Under this model, the fiscal sponsor acts as an intermediary between donors and the project, disbursing funds to the project as grants. While this approach may seem appealing for some projects, it introduces its own set of challenges.
At the project’s outset, the sponsor must determine their desired level of control and discretion (an IRS requirement) over the project’s capital. At the most extreme ends of this spectrum, the sponsor can regrant the FULL donation amount or tranche the funds into smaller amounts. In the first case, the sponsor is trusting the program to use the funds charitably and report on the expenses in a timely manner (what happens if the program disappears with the cash and never reports back?). In our view, this again creates Existential EIN risk and can cause loss of status, an unacceptable outcome. In the second case, the sponsor must decide how large the tranches are to show auditable control and discretion. With larger tranches, the sponsor ends up with the same risk as above; with smaller tranches, the sponsor is taking on significant operational complexity. Frequent reporting, accounting, and compliance requirements associated with handling numerous smaller grants can strain the resources and administrative capabilities of the fiscal sponsor. It may divert valuable time and effort away from supporting the core mission of the sponsored project.
Why be forced to make this choice at all? Why take on operational complexity or risk of fraud if you don’t have to? When doing fiscal sponsorship research, Model A and Model C are by far the most common, but each pose its own challenges. Fiscal sponsorship is designed to increase the velocity of impact, not impose bureaucracy that hampers everyone’s ability to deliver on their missions.
The Benefits of Model B Fiscal Sponsorship
Model B fiscal sponsorship strikes a balance between the extreme control, and proportional liabilities, of Model A and the operational complexities of traunched grants in Model C. Model B is often thought of as the “independent contractor model.” The relationship is similar to hiring someone to complete a job, tasks, or in this case, a charitable project. This gives the sponsor the necessary control and discretion over funds while limiting liability with a defined scope of work attached to the independent contractor agreement. With the scope of work in place, the project is able to draw funds, coordinate volunteers, and hire employees for uses that both the project and sponsor agree as charitable, with the project acting as its own entity, with its own EIN, insurance policies, and operating procedures. This protects the sponsor from activities that are conducted by the program outside of the stated charitable use. While this model may place a higher administrative burden on the program (i.e., they have to file taxes at the end of the year), it ultimately provides the sponsor control and discretion over the funds and protects them from Existential EIN Risk while giving the program more freedom to operate. Some of these benefits are discussed in detail below:
- Enhanced Accountability with Manageable Control: Model B fosters a collaborative relationship between the fiscal sponsor and the sponsored project. The fiscal sponsor sets reasonable guidelines and expectations for the use of funds, ensuring accountability while allowing the project leaders to make operational decisions independently. This balance empowers the sponsored project to pursue its mission efficiently, driving innovation and responsiveness, while the fiscal sponsor maintains a watchful eye on the financial activities to ensure compliance.
- Streamlined Administration and Resource Allocation: By entering into an independent-contractor relationship between the sponsor and project, the project is given the freedom to execute the project as they see fit, taking on penny-level accounting responsibility. The sponsor exercises control and discretion over the funds as they approve and release payments directly to the vendors of the project without being responsible for the transaction-level accounting. This can be done with the project considered a disregarded entity for the purposes of IRS reporting, allowing the sponsor to hold the funds on their balance sheet. I recognize that this is a huge shift from historical practices, and it greatly decreases the administrative work for the sponsor, allowing them to focus on the mission of the project, not the accounting. Model B frees up the sponsor for strategic support, networking, and capacity-building initiatives, maximizing the long-term impact of fiscal sponsorship and enabling fiscal sponsors to efficiently manage multiple projects simultaneously and expand their reach and influence in the philanthropic landscape.
- Encouraging Diverse and Mission-Driven Projects: The flexibility offered by Model B fosters diversity in the sponsored projects and enables the sponsor to achieve their mission via multiple avenues. With more autonomy, project leaders can pursue unique and innovative approaches to address social issues. This diversity enriches the philanthropic sector and allows fiscal sponsors to cater to a wide range of causes and initiatives, aligning with their mission and values.
In conclusion, Model B fiscal sponsorship offers significant advantages to fiscal sponsors when compared to Model A and Model C. Model B mitigates operational liabilities, empowering fiscal sponsors to focus on supporting projects strategically. Model B’s collaborative approach also promotes project autonomy while maintaining appropriate oversight, enhancing accountability and responsible fund usage. Moreover, the streamlined administrative processes under Model B allow fiscal sponsors to efficiently manage multiple projects and allocate resources more effectively.
Model B represents a compelling and balanced choice for fiscal sponsors, fostering a supportive and dynamic environment for charitable initiatives to thrive.