Fiscal sponsorship can be an ideal arrangement in which an established nonprofit organization (the fiscal sponsor) provides its Section 501(c)(3) tax-exempt and legal status to a project that furthers the fiscal sponsor’s mission. For detailed descriptions of the most common fiscal sponsorship arrangements and best practices, see Fiscal Sponsorship and National Network of Fiscal Sponsors.
Fiscal sponsorship (“FS”) arrangements are of limited duration. What happens when the relationship ends, the project work terminates, or some other transition occurs?
If the FS relationship is set forth in a written agreement, the agreement will typically contain provisions addressing what occurs upon termination of the relationship. Circumstances may arise when it is necessary to end or transition the relationship. If these circumstances are not addressed in the written agreement, the fiscal sponsor staff and project leaders must discuss the timing, steps and procedures for separating or terminating the project.
The following is a list of common circumstances in which a FS arrangement terminates:
- The project establishes a relationship with a new fiscal sponsor and transitions the project work and any fund balance from the previous fiscal sponsor to the new fiscal sponsor.
- The project work comes to an end, and there is no further need to operate in a FS arrangement. If there are any funds remaining, the fiscal sponsor will either return the funds to the donors or grant the funds to an eligible charitable recipient.
- The project has gained enough scale, traction, and financial viability to establish a separate entity and obtain tax exemption on its own.
- The fiscal sponsor terminates the relationship, in response to the project having violated certain terms of the FS agreement, or the project having been inactive for a certain period of time.
- The project merges with another 501(c)(3) entity, and any remaining project funds are transferred to the new entity.
The increased use of FS to incubate new charitable endeavors has attracted scrutiny by government regulators of charitable organizations. Structured correctly, FS arrangements hold exciting potential to create large-scale social good by incubating and developing legitimate social enterprise activities.