FAQs About Fiscal Sponsorship
What is Fiscal Sponsorship?
Fiscal sponsorship is a common means by which individuals and organizations can start new, nonprofit programs without establishing a separate 501(c)3 organization. Fiscally sponsored projects are able to get their charitable, tax-exempt status from their fiscal sponsor. There are several forms of fiscal sponsorship (see Greg Colvin's Fiscal Sponsorship: 6 Ways To Do It Right ), but in every case, the fiscal sponsor is required to ensure that all funding received on behalf of the project will be utilized for tax-exempt, charitable purposes as defined in the internal revenue code.
CTA offers two forms of fiscal sponsorship.
Model A Fiscal Sponsorship Relationship
The first is Comprehensive Direct Project Fiscal Sponsorship (“Model A”). In this case, the fiscally sponsored project and CTA are legally one and the same. The Project belongs to CTA so CTA assumes total liability for the Project's activities. All Project employees become at-will employees of CTA, subject to the same personnel policies and benefits of all other CTA employees. Charitable donations are made to CTA for the benefit of the Project, and CTA files all government forms (e.g., 1040, 1099, 990, payroll tax returns). The Project must organize an Advisory Board of at least five members, which works with the Project Director to oversees the Project's staff, implement programming, and undertake fundraising.
In the “Model A” relationship, CTA supervises (via the Project Director and Project Advisory Board) all programmatic operations of the Project, and offers training and mentorship to help the Project build a vibrant and sustainable organization. Projects often view CTA as an incubator--a supportive space with expertise in social entrepreneurship where they can focus on developing a highly effective and financially viable organization, while CTA handles the business and reporting side of things. All Projects benefit from the cost sharing opportunity offered by our structure.
Please see CTA-Project Model A Affiliation Agreement for more details on this arrangement. Additional information about Comprehensive Direct Project Fiscal Sponsorship can be found at the National Network of Fiscal Sponsors Guidelines for Comprehensive Fiscal Sponsorship.
Model C Fiscal Sponsorship Relationship
In the case of a Pre-approved Grant Project (“Model C”), CTA re-grants funds received from a donor to the Project. CTA is NOT responsible for the Project's programmatic operations. Instead, these operations, as well as incurred liabilities to third parties, are the ultimate responsibility of the Project. In addition, no one in a “Model C” project is considered an employee of CTA.
Under the “Model C” agreement, CTA is responsible for the financial administration of a restricted fund. We makes grants from this fund to support the Project at our discretion. The Project is responsible for maintaining adequate records to show that these funds are being used solely for the intended grant purposes. Any funds that are not spent must be repaid to CTA. All other responsibility related to the Project rests with the Project — including the preparation of grant reports to its funders and to CTA.
Please see CTA-Project Model C Regranting Agreement for more specifics about this arrangement. For more information, see the National Network of Fiscal Sponsors Guidelines for Model C, a Pre-Approved Grant Relationship.
Will a fiscal sponsor provide funding for the Project?
Fiscal sponsorship is not a funding relationship. As with most fiscal sponsors, CTA requires that the fiscally sponsored Project raise it own funds. CTA charges a fee to cover the shared administrative costs associated with our services; the fee is a percentage of the Project's income.
Why seek a fiscal sponsor?
Establishing and maintaining an independent 501(c)(3) can be expensive, confusing, and time-consuming. Being fiscally sponsored is not only extremely cost effective but eliminates the worry and hassle associated with the required filing and record-keeping of a 501(c)(3). This means that you can focus on testing new approaches to resolving difficult social problems, establishing a viable financial model, and supporting volunteers and staff to implement the programs. In an environment where funding for all nonprofits is scarce, fiscal sponsorship is an efficient and economic way to reduce the cost of running an organization and still benefit from highly qualified and experienced infrastructure.
What is a 501(c)(3) organization?
The term 501(c) refers to a subsection of the United States Internal Revenue Code that lists the types of nonprofit organizations exempt from certain federal taxes. Section 501(c)(3) is one of the tax law provisions granting exemption from the federal income tax to nonprofit organizations that exist for religious, charitable, scientific, literary, or educational purposes, among others. CTA has been a designated 501(c)(3) nonprofit organization since 1971.
Does it matter where I set up my Project?
Yes. All of CTA's Projects must be located in New York State.
How can I become a CTA Project and how long does the process take?
Please read our Project eligibility guidelines here.
What mission must my project have?
CTA is chartered as an educational organization and requires that its Projects undertake activities that have a transformative focus that falls within the scope of CTA's mission. Please see our Project eligibility guidelines here.
What obligations come with being a fiscally sponsored project?
Upon agreeing to be a Project of CTA, you will be accepting the terms of the CTA's Model A or Model C Agreement. As part of that agreement, you accept responsibility to undertake activities only in accordance with the express purposes stated in your project proposal as approved by our Board of Directors. Any substantive changes in project activity or purpose will be subject to re-evaluation.
Who bears legal responsibility for my project's activities?
In a "Model A" relationship, CTA bears full financial and legal liability for the activities of its Projects. The extent of this liability is defined by law.
In a "Model C" relationship, CTA is responsible for the financial administration of a restricted fund, and makes grants from the fund to support the Project at its discretion. The Project must use these funds solely for the intended grant purposes and repay to CTA any portion of funds that are not spent. All other authority and responsibility related to the Project rests with the grantee — including the preparation of grant reports to its funders and to CTA.
Do the funds I raise for my Project belong to me or to CTA?
All funds received and raised by you for the express purpose of operating the Project are the property of CTA. This is because tax deductible donations must be given to a 501(c)(3) organization. The disbursement of funds to cover expenses of the Project is subject to the approval and review of the CTA Board of Directors or their designee. Under the fiscal sponsorship agreement (Model A or Model C), CTA is obligated to restrict those funds to the Project with the exception of administrative expense fees used to cover shared costs for CTA's services.
If CTA is the recipient of donations and grants, how does the Project maintain control of its funding?
Funding received for our Projects is restricted for the purpose of engaging in the activities of the Project as stated in its mission and approved by the CTA Board of Directors. Project funding received from grants is restricted by the conditions under which the grant was made.
If I seek a fiscal sponsor do I have to avoid seeking 501(c)(3) certification for my Project?
No. In fact, having a fiscal sponsor can help you progress more quickly toward becoming a viable non-profit agency. CTA offers help in working through the process of becoming an independent organization.
Are projects with fiscal sponsors non-profits?
By obtaining a fiscal sponsor, the project can end up with any of several relationships to its non-profit status. Our "Model A" Projects become part of our organization, meaning they are operating units of a non-profit organization. In a strict legal sense, our Projects are not separate organizations; they are units of CTA.
Most of our "Model C" Projects have incorporated as non-profits in New York State, but do not have 501(c)3 tax exempt status.
What are incubation services? How do they differ from fiscal sponsorship?
If your Project aims either to become a large scale program or a separate entity, it will need to undertake efforts that extend beyond simply operating an effective program. The operation of the project will also have to effectively develop organizational capacity. It is for the latter purpose that incubation services are targeted.
How and why may the relationship with CTA end?
Fiscally sponsored Projects end their work with CTA for various reasons. They may:
- Complete their work and spend down all their funds. If the Project's work is done, but funds remain, the Project may designate a like-minded 501(c)(3) to receive the funds, or if appropriate, the remaining funds may be returned to the donor.
- Transfer to another 501(c)(3) organization that will serve as the fiscal sponsor. In this case, any remaining Project funds are transferred to the new fiscal sponsor, and the Project's grantors are notified of the transfer of sponsorship.
- Register their own 501(c)(3). The Project's new tax-exempt organization assumes responsibility for its own operation, and any remaining Project funds on account with CTA are transferred to the new entity. CTA staff will work with the Project to facilitate this transition.
Regardless of the reason for ending the relationship with CTA, any intellectual property created by the Project while under CTA belongs to and goes with the Project.