A fiscal sponsor nonprofit is a public charity that lends its tax-exempt status to organizations conducting charitable programs that are otherwise not tax-exempt. Fiscal sponsors generally also provide services to their fiscally sponsored organizations in the form of financial oversight and administrative support, typically in exchange for a fee.

In theory, fiscal sponsorships are designed to incubate very new, small charities, allowing them to collect donations and operate charitable programs under the fiscal sponsor’s tax-exempt status temporarily as they work towards establishing themselves as legally separate organizations. The latter would include things like creating articles of incorporation and bylaws, filing for incorporation in their state of operation, obtaining their own tax-exempt status from the IRS, putting together their own board of directors, adopting governance policies, buying insurance, taking on responsibility for payroll and vendor payments, among other administrative tasks.

The Good and Bad of Fiscal Sponsorships

When fiscal sponsorships are used as incubators, these arrangements can be a good thing since they help new charities get on their feet while better ensuring they don’t make big mistakes in their legal, accounting, or reporting obligations. Unfortunately, when a fiscal sponsorship perpetuates for many years and the sponsored charity never spins off into its own, separate organization, this creates a black hole of accountability for donors and the public at large.

Like other types of charities, fiscal sponsors are required to file an IRS tax Form 990 with the IRS each year. Many larger fiscal sponsors are also required to have an independent audit of their finances conducted annually. However, reporting rules generally do not require a fiscal sponsor to provide separate breakouts of the finances of each of the organizations it is sponsoring. Rather, the fiscal sponsor’s total revenue and expenses are reported in aggregate and include its own financial activities, as well as the financial activities of all the organizations it is sponsoring. This makes it impossible to judge the financial efficiency of any of the individual organizations included in the sponsor’s financial reporting. 

CharityWatch Provides Commentary

CharityWatch CEO, Laurie Styron, spoke with Spotlight on Maryland reporter, Patrick Hauf, about Fusion Partnerships, which recently announced that it will be winding down all of its fiscal sponsorships.

“Fiscal sponsors file taxes for their partners under one form, meaning the income and spending of their many clients are combined. This prevents tax forms from showing how each organization spends its income, even if it comes from taxpayer dollars.”

“Laurie Styron, the CEO and executive director of CharityWatch, said fiscal sponsors can become inefficient and lack transparency when using taxpayer dollars.”

“‘Anytime you have layers of different organizations in between the money and the end recipient, there’s always going to be additional overhead costs at the different legal entities that are occurring,’ Styron told Spotlight on Maryland.”

“So if the money is going from the government to then a fiscal sponsor to then a fiscally-sponsored organization and then, eventually, maybe granted to an individual or used to carry out specific programs, there’s going to be overhead costs all along the way that take a cut of that money.”

CharityWatch Calls For More Accountability

One of the most frustrating things about the lack of public accountability of fiscal sponsorships is that breakouts of the financial operations of each sponsored charity already exist, but fiscal sponsors are simply not required to publicly share such breakouts in their audits and tax filings.

Fiscal sponsors must maintain separation of the finances of the charities they are sponsoring for their own, internal records. So the financial information exists. Not sharing such information with the public is a loophole that needs to be closed because it makes it too easy for charities to avoid public accountability for how they use public dollars.

A fiscal sponsor that is committed to public transparency should willingly share this information with the public and should do so in a format that is adequate for holding individual charities and the people operating them accountable.

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