When it comes to nonprofit management, there are two common terms that often get used interchangeably—fiscal sponsorship and fiscal agency. While they both involve one organization providing support to another, they have distinct differences. In this post, we’ll dive into what these terms mean, how they work, and why clarity is essential before entering into any agreement.

What is Fiscal Sponsorship?

A fiscal sponsor is a nonprofit organization that provides oversight, management, and support to a project or program that does not have its own 501(c)(3) status. In this arrangement, the fiscal sponsor takes on financial and administrative responsibility for the program, acting as its legal and fiscal entity.

Here’s how fiscal sponsorship works:

• Shared Tax-Exempt Status: The program that is under the fiscal sponsor’s oversight benefits from the sponsor’s tax-exempt status. This means the program can receive tax-deductible donations, just as if it were a 501(c)(3) itself.
• One Entity in the Eyes of the IRS: For tax purposes, the fiscal sponsor and the program are considered a single entity. This makes it possible for the program to operate under the nonprofit umbrella without the need for separate tax filings.

Responsibilities of the Fiscal Sponsor

The fiscal sponsor holds several key responsibilities in this arrangement:

• Fiduciary Duty: The sponsor must maintain control over the funds and ensure they are used appropriately for the project.
• Recordkeeping: The fiscal sponsor is responsible for maintaining proper financial records that support the use of funds and demonstrate compliance with regulations.
• Legal and Tax Compliance: It’s the fiscal sponsor’s responsibility to ensure the program adheres to all legal, tax, and financial requirements.
• Mission Alignment: The fiscal sponsor must ensure that the program is aligned with its own nonprofit mission.

It’s crucial for both parties to have a fiscal sponsorship policy and agreement in writing to clearly define the relationship and ensure a clean onboarding and offboarding. The fiscal sponsor can also charge a management fee to cover administrative costs, such as financial oversight and reporting.

What is Fiscal Agency?

A fiscal agent, on the other hand, is an organization that provides administrative or financial support for another program or nonprofit, but with less control and responsibility compared to a fiscal sponsor.

Here’s how fiscal agency works:

• No Control or Fiduciary Responsibility: Unlike a fiscal sponsor, the fiscal agent does not have ultimate responsibility for the program’s activities or financials. The fiscal agent typically serves as a point of contact for financial administration, but it does not make decisions about how funds are used.
• Separate Entities: In the eyes of the IRS, the fiscal agent and the program are separate entities. This is a key distinction from fiscal sponsorship, where the program and sponsor are treated as one.
• Management Fee: Fiscal agents typically charge a management fee for their administrative services, but they do not provide the same level of oversight as a fiscal sponsor.

Just like with fiscal sponsorship, it’s important for both parties to have a written agreement outlining the relationship, terms of service, and expectations.

Due Diligence is Essential

Before entering into either a fiscal sponsorship or fiscal agency relationship, due diligence is key. Ensure that the organization you’re working with is reputable, understands the responsibilities involved, and is aligned with your mission. Understanding the differences between these two models can help you make an informed decision that benefits your program and the community you serve.