10 Questions Funders Should Ask Grantees Who Use Fiscal Sponsors

1. Is there an alignment between your mission and your fiscal sponsor’s mission?

Mission alignment is a pre-requisite for any fiscal sponsorship relationship.

2. Is your fiscal sponsor financially sound and does it follow the appropriate standards of financial management, transparency, and integrity?

Financial principles of accountability, transparency, and integrity are the cornerstones of any fiscal sponsorship relationship. It is crucial for the fiscal sponsor to comply with applicable regulations, including Generally Accepted Accounting Principles (GAAP, guidelines for financial accounting and reporting), and Circular A-133 (audit requirements for nonprofits). To evaluate a fiscal sponsor’s compliance with financial standards, the grantee should ask the following questions:

• Are the fiscal sponsor’s financial records accessible on demand?

• What written policies provide checks and balances to safeguard funds?

• What system does the fiscal sponsor use to monitor program expenditures and activities?

• Does the fiscal sponsor arrange for an annual audit of its finances overseen by an independent audit committee?

• Does the fiscal sponsor post its 990 and the results of its annual audit on its website?

3. Do you have a written agreement with your fiscal sponsor?

Without a written sponsorship agreement or memorandum of understanding, the fiscally sponsored project has no recourse especially since the sponsor must retain sole authority over charitable funds. It is recommended that the funder request a copy of the agreement with the other documents requested at the time of application.

4. Do you understand the implications of the model of fiscal sponsorship your project is using?

While Gregory Colvin’s Fiscal Sponsorship: 6 Ways to Do It Right outlines six ways to structure the fiscal sponsorship relationship, in practice, the vast majority of projects are either Comprehensive Fiscal Sponsorship (or “Model A. Direct Project,” in Colvin’s terminology) or Pre-Approved Grant Relationship (“Model C”). These different models involve different legal relationships, different liabilities for both sponsor and fiscally sponsored project, different ownership of the project results, and different tax filing responsibilities. They also have different models of best practices as indicated in the National Network of Fiscal Sponsors Guidelines.

Arts activities generally use the Pre-Approved Grant Relationship model (Model C), but they can also use other models. In Model C, foundation grants and donations may be the only funds going through the sponsor (and therefore given oversight). Earned revenues from the same project activity will not necessarily show up on the project budget the fiscal sponsor produces. These revenues are not required to go through the fiscal sponsor in a Model C relationship (although in many cases they do, especially when the fiscally sponsored project wants all its activity represented in one place). One reason some arts-based fiscally sponsored projects prefer this model of fiscal sponsorship is to avoid a fee on their earned income.

The Pre-Approved Grant Relationship model of fiscal sponsorship is widely misunderstood and easily abused as a “conduit” when the fiscal sponsor fails to exercise the requisite “discretion and control.” The key element to avoid in fiscal sponsorship relationships is the creation of a “pass-through” or “conduit” arrangement. The fiscal sponsor must exercise “variance power” or independent “discretion and control” over the fiscally sponsored project for the relationship to pass IRS muster.

Projects that utilize Comprehensive Fiscal Sponsorship (Model A), become a part of the fiscal sponsor's organization and operate as a program as the fiscal sponsor. A comprehensive fiscal sponsor assumes all legal and fiduciary liability for the project's activities, all employees are employed by the fiscal sponsor, and all monies must be held by the fiscal sponsor as the only legal entity of record.

5. What other services does the fiscally sponsored project receive?

Fiscal sponsors typically provide a variety of services beyond tax-exempt status, which will vary among sponsors, but can include accounting, grants management, human resources, payroll and benefits administration, insurance, office or meeting space, group purchasing, professional development workshops and consultations, and opportunities for outreach, marketing, and publicity. With the Pre-Approved Grant model, however, there can be no employees and the sponsor generally does not insure the project. If “use of the tax-exempt status” is the only service provided and there is insufficient oversight, you should be forewarned that the IRS may deem this a disallowed pass-through transaction for which there is a penalty to the donor.

6. What does fiscal sponsorship cost?

The cost structure should be spelled out in the fiscal sponsorship agreement or policies. Sponsors' administrative allocations can range from a token amount to 25 percent, but an average is around 10 percent. Some fiscal sponsors allocate these costs to revenues as they are received; others add the allocation to expenses as they are incurred. The San Francisco Study Center maintains a national directory of fiscal sponsors , including information on each sponsor’s fees.

An issue that comes up when a fiscally sponsored project wishes to change sponsors is whether the administrative allocation on the unexpended funds will be returned. There is no uniform agreement on this question in the field, but it is useful for the project to know its sponsor’s practice. In any event, how the relationship between the FSP and the fiscal sponsor is terminated should be spelled out in the initial agreement.

7. Do you get regular, timely, accurate financial accounting of your sponsored funds?

Without such accounting, your grantee does not have a reliable fiscal sponsor.

8. Does your fiscal sponsor provide programmatic and financial oversight of your project?

This is another way of inquiring whether the fiscal sponsor is exercising appropriate “discretion and control” of the donated funds. Typically, the sponsor will not be involved with artistic or programmatic decisions but will verify that the project is being carried out according to the plans laid out in your grant proposal and the FSP’s contract with the sponsor.

9. Does your fiscal sponsor file your grant reports with your grantors?

The fiscal sponsor is the grantee of record and should be tracking, submitting (or assuring submission), and maintaining copies of any required reports. As a funder, your legal relationship is with the sponsor, not the fiscally sponsored project, so it serves you to know how the fiscal sponsor operates.

10. Does your fiscal sponsor follow the National Network of Fiscal Sponsors’ guidelines for best practices?

While the NNFS only issued its best practices guidelines in the Spring of 2010, they are the culmination of years of work and discussion among fiscal sponsors of all sizes, from around the country, and representing a variety of disciplines. The best way for these guidelines to become widely disseminated, and more important, widely followed, is for the philanthropic community to ask its grantees to adhere to them.

Part of the impetus in the fiscal sponsorship field to codify these “best practices” was to help funders understand the fiscal sponsorship relationship and to weed out those sponsors (which are unfortunately still out there) who give the field a bad name by merely “passing through” or laundering the funder’s grant money.