A Brief Introduction of Fiscal Sponsorship Agreement
In the case of a non-profit fiscal sponsorship agreement, the non-profit organizations help projects which are involved in activities of the non-profit organizations with tax exemptions, which are provided by law to the non-profit organizations.
The projects are provided with services like payroll, training, physical infrastructure; employee benefits apart from tax benefits. Projects don’t need to worry about these services and can instead focus on programs that are their core activity.
Projects benefit from such sponsorships as projects are usually short-term, have difficulty in finding a source of funding, and eventually can be transformed into full-fledged non-profit organizations.
There are different fiscal sponsorship models, such as:
- Comprehensive fiscal sponsorship: The project sponsored by the fiscal sponsor becomes the sponsor’s project
- Independent contractor project: The sponsor owns the project, but a separate entity conducts it
- Pre-approved grant relationship: Project applies for more than one grant but is only provided with the grant that the sponsor receives from the donor
- Group exemption: The sponsor gets the group tax benefit, passes on the 501 (c) (3) status to the project
- Supporting organization: The project acquires its own 501 (c) (3)
- Technical assistance: the sponsor helps the project with bookkeeping, payroll and tax returns
Who Takes the Fiscal Sponsorship Agreement?
There are two parties to fiscal sponsorship, the non-profit organization, and the project. The project has certain challenges like funding, taxation, and growth. These administrative challenges are handled by the sponsor for a fee.
How to Record Sponsorship in Accounting?
As there is some benefit derived by the sponsor, the sponsorship is categorized as a business expense, and you can avail of deduction from pre-tax profits.
Purpose of the Fiscal Sponsorship Agreement
Whether you are a project looking for financial or administrative assistance or a sponsor wanting to provide these services, these agreements are extremely important. These agreements outline the exact nature of services that the sponsor will provide for the project. The sponsor could be offering back-office functions and managing charitable contributions on behalf of the project. The fee which is charged by the sponsor is usually a percentage of the budget that is sponsored.
The fiscal sponsorship IRS requirements are met by the sponsor by ensuring that it decides the use of the contributions. Without such agreements, it would be difficult for projects to obtain funding as they would lack the credibility that established sponsors have. Without funds, focusing on the activities for which the project was started will be impossible.
Contents of the Fiscal Sponsorship Agreement
A sample fiscal sponsorship agreement will show you the information that should be part of such agreements. The standard contents are:
- The names of the parties to the organization, the financial sponsor and the sponsored organization
- The sponsored organization will receive the grants until it receives the IRS code 501 (c) (3) for tax-exempt status
- The duration of the agreement, including the start and the end date
- The effective date of the agreement
- The project funds shall be held by the fiscal sponsor in designated bank accounts, and the sponsored organization will need to request withdrawal of funds
How to Draft the Fiscal Sponsorship Agreement?
You may refer to a fiscal sponsorship agreement template while drafting an agreement. Here are some points you need to consider:
- Participation eligibility: Both the partners should be of legal age, of sound mind and not coerced into entering the agreement.
- Consideration of fee payable by the sponsored organization to the sponsor, the due date for payment and penalty for non-payment.
- Contract terms: The terms of the contract should be fair to both the sponsor and the sponsored organization.
- Confidentiality clause: Any confidential information relating to the agreement (Proprietary information)should not be shared with a third party
- Governing law in accordance with which the agreement is made
- Termination of the contract clause,
The sponsor will prepare a draft agreement for the sponsor organization. The sponsor organization can negotiate any clause. The sponsor organization can make a counteroffer to the sponsor. Once both parties to the agreement have understood all clauses, the agreement can be signed.
Benefits and Drawbacks of the Fiscal Sponsorship Agreement
The benefits of a fiscal sponsorship agreement are as under:
- Protection of interest: The interest of both the sponsor and the project is secure. The sponsor can provide the required funds or other facilities for a fee, and the sponsor organization can get all important resources like administrative and financial assistance.
- Legal protection: If any party violates a clause, then the other party can take legal action
- Tax benefits: The sponsored organization can also avail tax benefits
- Encouraging new organizations: New organizations can grow and become non-profit organizations
The drawbacks of a fiscal sponsorship agreement are as under:
- No legal remedies: In case of violation of any clause of the contract, neither party can take legal action as there is no written contract
What Happens in Case of Violation?
In case of a violation of a fiscal sponsorship agreement, both parties can take legal action through money damages claim. They can include lost profits in case of a total breach. If one party is not competent, then the other party needs to be restored to its original position in terms of money and property through restitution(1).
The use of fraud in the agreement leads to either cancellation under rescission or a new contract under reformation. When the contract is at an advanced stage, then money damages are not acceptable. In such cases, the other party has to fulfill the contractual obligation through specific performance.
Before entering into a fiscal sponsorship agreement, the sponsor and the project should ensure that the important clauses like confidentiality clause, termination clause, and dispute resolution clause are included. The rights and responsibilities of both parties should be clearly defined.