How Fiscal Sponsors Can Help Our Sector Weather the Storm
And what we need to do to get ready
Challenges to the nonprofit sector and much of the civil society work that we support are mounting, with more certainly to come. The broadest threats to the sector at the moment are threats to withhold previously committed grant funds from both government and private funders, and the passage of HR 9495 (or a similar law) and its powers to revoke tax-exempt status for organizations suspected of supporting “terrorism”. And of course, there are the multitude of threats to particular groups principally BIPOC, immigrant, and LGBTQIA+ communities, as well to the health of our environment and of our fellow citizens.
STRATEGIES
The fiscal sponsorship community is well positioned to help provide a bulwark for communities against attack and a refuge for civil society work. We can do this in two ways.
Safely Harbor - In addition to providing core shared support, sponsors can allow for various levels of public visibility for project activities, while ensuring those projects remain fully compliant with accounting, tax, and charitable laws and regulations. We will also likely see sponsors becoming a refuge for the work of stand-alone nonprofits under attack, and sponsored projects may need to spin and move to other sponsors to evade threats. As volatility in our sector increases, sponsors can be places of repose, even if temporary, even if in transit.
Legally Hinder - Fiscal sponsorship structures, in particular those that manage multi-entity environments (Model “L” Disregarded Entities and affiliated c3 and c4 structures) can help allocate legal risks (for both projects and sponsors), potentially delay challenges, and respond to legal and public reputational attacks by supporting legal defense and crisis communications needs of projects. Though the added cost and complexity of managing such structures may be prohibitive for many smaller sponsors.
The general maelstrom of attacks is, of course, intentional and meant to induce confusion, catatonia, and despondency. We have to resist this intention. We’re only two weeks into this administration with about 206 weeks left to go, assuming we can keep our Republic, as Franklin famously admonished. We have it on good authority from the national advocacy community that the Heritage Foundation’s Project 2025 strategy is “flood the zone” with actions in the hopes of depleting emotional and financial resources in the first two years, saving the truly democracy-smashing moves for the second half of the administration when the collective war chest is empty.
THREATS
So, we need to stay focused, mainly on the barriers that are actually preventing our work from moving forward on a day-to-day basis. The most radical act of resistance is to keep showing up and getting the work done. To keep tabs on the things to watch in keeping our missions moving, the best up-to-the-hour summary of the challenges to our sector is maintained by the National Council of Nonprofits (NCN). Ultimately, many of these actions will need to be challenged in the halls of Congress and in the courts and our community needs to back the efforts of the main national advocacy organizations leading the charge. In addition to NCN, these are the Council on Foundations, Independent Sector, United Philanthropy Forum and the Philanthropy Roundtable, along with non-sector-specific legal advocacy groups such as the ACLU.
In order to cut through the static and remain focused and grounded, we offer that most if not all of the risks and attacks that are current, pending, and coming down the pike are likely to fall into one of four buckets:
Withholding/eliminating government and private funding. We’ve already seen this with the EO freezing (“impounding”) federal funds already legislated by Congress. Though the freeze on some impounded funds have been temporarily rescinded, a staggering amount of international aid remains frozen, and we’ll certainly see these domestic freezes and revocations recur in the days to come. About 30% of the entire financial throughput of the nonprofit sector comes from government (federal, state, and local), a significant vulnerability for our sector. We know that the fiscal sponsorship community, in particular those sponsors working in environment and health and human services, manages a significant amount of government funds. Among just the 100 sponsors responding to our 2023 field scan $575 million in government funding for projects was reported. Additionally, we are seeing the beginning of private funding rescinded for fear of political backlash.
Threats to revoke nonprofit status and taxing endowments. Even before the election the threat of HR 9495, the so-called “Nonprofit Killer Bill”, loomed large. We are likely to see this or a similar bill passed by Congress in the coming months, though there are existing laws on the books that grant the government wide latitude to revoke tax status. The proposed new bill gives the Secretary of the Treasury broad powers to revoke nonprofit status for nonprofits suspected of supporting “terrorism”. Once served, the organization has 90 days to prove its innocence. While there are some due process provisions, the definition of what constitutes terrorism is vague at best, and we anticipate the administration to weaponize such a term in the pursuit of lawfare against various communities and activities. Additionally, one of the recent EOs has targeted private foundations and charities with endowments/budgets greater than $500 million for “investigation” and potential excise taxation, and large eds and meds remain in the crosshairs of Vice President Vance. And we are hearing that new nonprofit IRS 1023 federal exemption applications are receiving enhanced scrutiny, which may push more founders to fiscal sponsors.
Surveillance, investigation, and lawfare against certain practices and missions. It has always been an unfortunate truth that lawsuits can be brought for even the most flimsy reasons. Sometimes the purpose is not to win, but to deplete resources and siphon time and energy. While most of the government’s attacks on “DEI” and other civil society policies and practices is focused presently on what the federal government can control directly, we are already seeing swift extension of legal challenge into the private and nonprofit sectors. Just this week, the New York Times reported that a federal Office of Personnel Management email, deiatruth@opm.gov is signing up nonprofit mailing lists–the same email the administration has asked DEI whistleblowers to use. Challenges will not only come from government, but also from private litigants.
Reputational attacks in the press and media. Finally, targeting of fiscal sponsors in the media and on social media has already been mounting, as seen in Fox45’s hit pieces on Baltimore’s fiscal sponsor community and others. Several of our community leaders have already been called to testify before Congress, and there has been a sustained effort in recent years by the right to paint fiscal sponsors as agents of the “Liberal Deep State” and as “dark money” managers. Negative publicity about sponsors will incite doxing and trolling of both sponsors and project leaders.
RESPONSE
It is important to note that the structures and practices of fiscal sponsors don’t offer an impenetrable shield against the above risks. Scale and public presence will draw some of the first fire against fiscal sponsors. But we can offer some means of resistance–slowing down legal and other adverse processes. And collective infrastructure is collective capacity and collective capacity is strength in numbers. This strength will be essential in the months to come. There are four ways in which all models of fiscal sponsorship can help projects and our sector.
Assemble and make ready financial, communications, and legal defensive resources, both professional guidance and cash.
Ensure a high degree of good housekeeping and compliance to reduce risks and exposures that give attackers leverage.
Provide the strength to say NO (where legally possible), whether on behalf of a project or your entire community.
Organize multiple stakeholders to protest, advocate, and/or legally lobby (within (c)3 safe harbor limits) for causes and legislative change.
Beyond these general ways we can assist, the below are ways the various fiscal sponsorship models can address the above risks.
Pre-approved Grant Model “C” Sponsorship - as a means to move charitable funds to individuals and entities lacking tax exemption working on the front lines of need. The critical role that Model “C” sponsors play in allowing charitable funding to flow in a legally compliant way in a responsive and targeted manner is well known. It has been and will remain a central resource for disaster response. It also allows a compliant path for charitable activities being operated outside of charitable organizations proper–offering some way to address risks 2, 3, and 4 above.
Comprehensive Model “A” Sponsorship - as a refuge for projects and stand-alone nonprofit organizations under attack. The comprehensive model makes projects equivalent to an in-house program of the sponsor, while still allowing independence of public identity, certain decision making, and the ability to legally exit the relationship. It also allows constituent projects to modulate their public presence, in particular if they are doing legitimate work that is the target of political attack, which again can help address risks 2, 3, and 4. We can also expect sponsors to see a high degree of spin in and out, as risk is redistributed in the field with some projects moving from sponsor to sponsor, and as some stand-alone organizations under duress move into comprehensive sponsors as a refuge.
Disregarded Entity Model “A-L” Sponsorship - using the sole member nonprofit corporation as a shell and shield, and the LLC as an “operations container”. The sole-member disregarded entity model provides all of the holistic back office support of Model “A” but contains the project in a sole-member subsidiary LLC, which is “disregarded” in the eyes of IRS, as all financial activity and nonprofit compliance is consolidated into the parent. With the project in a separate legal entity, risks 3 and 4 may be mitigated and allocated, as the sponsor entity enjoys the legal protections afforded the LLC members. Project portability also may assist in times of challenge, since all the assets, accounts, employer relationships, etc. for the project are contained in the LLC, spin out is a matter of simply changing sole members of the LLC from one charity to another. Finally, addressing risk 2, a sponsor might move all of its assets into a subsidiary LLC, making its charitable entity a shell holding a tax letter. If the tax letter is pulled, the sponsor could discard its parent entity and move its own LLC (and any other LLCs) to another charitable parent, possibly without interruption of operations. This solution is not foolproof and is at best a lawfare delay tactic.
Donor Advised/Collaborative Funds - as a means for private funders and donors to retain some distance in giving to certain charitable work. Lastly, fiscal sponsors are often the holders of Donor Advised Funds (DAFs), which offer some protection of identity for donors, and collaborative funds, which are built from contributions from multiple donors/funders toward a particular impact area, or to allow for different decision making approaches to allocating funds, such as participatory grantmaking. To address risk 1, we may see collaborative funds being assembled to replace losses in government and private funding for sponsored projects. Concerning risk 2, we may see more private philanthropies making grants through DAFs or simply making unrestricted gifts to the sponsor with instructions to allocate to a particular project, so that they can stay out of public view. Lastly, DAFs can be a place for sponsors to park non-operating net assets to protect them from seizure.
READINESS
All of the attributes above become limited in value to projects, if fiscal sponsors’ own shops are not in order. Things that three months ago might have been viewed as minor infractions or management weaknesses, are now distinct vulnerabilities. It won’t take much to invite an investigation.
Here are SEVEN THINGS YOUR ORGANIZATION CAN DO RIGHT NOW to mitigate risks.
MAKE SURE…
Your core compliance obligations are current. This includes IRS Form 990 filings, statutory gift acknowledgements, corporate registration filings, charitable filings and registrations, and employer/contractor tax filings.
Your insurances are up to date and cover current exposures, in particular Directors & Officers insurance, Errors & Omissions, and statutory insurances, such as Workers Compensation, if you operate in states where certain insurances are required.
You’re practicing sound, accrual-based fund accounting and know current revenues, expenses, and net assets for all individual projects, as well as how much Liquid Unrestricted Net Assets you have for your sponsored project portfolio separate from the rest of your organization’s activities.
You maintain and enforce document, spend, HR, and contract management policies, ensuring accountability through clear financial approval processes, compliant document retention, healthy worker relationships, and up-to-date contract compliance across your organization and projects.
You engage in ongoing analysis of your portfolio and have financial contingencies. You understand current and emerging financial concentration risks (such as funding from government sources, materially large single grants and contracted revenue agreements) and politically vulnerable charitable activities. Along with the recent government freezes, we’re seeing private funders also rescinding grants, so review your grant agreements for clawback and recision terms.
Your core legal agreements are complete and compliant, including having clear variance power clauses in Fiscal Sponsorship Agreements, and other key terms defining the sponsor-project relationship.
You orient your projects on how best to communicate in this environment and encourage them to identify contingency spin-out options. Projects and sponsor teams need to know the basics of communications strategy and what constitutes lobbying, advocacy, libel, and slander–things that could easily become exposures in today’s online spaces. Also, projects should identify and possibly even pre-negotiate emergency spin-out options, in case the operations of the sponsor or project become compromised.
We need to consider scale and portfolio size relative to concentration risk.
Fiscal sponsors are and will continue to be important advocates and defenders of justice and civil society. However, as a field, we need to carefully consider, from here forward, how we balance achieving economies of scale in our portfolios with the attendant concentration risk (the number of projects operating under one entity) that comes with size. There’s not a magic answer here. In our experience, sponsors that are more strategic and intentional in how they shape and steward their communities of projects tend to find healthier balances between economies of scale and right size (not growth for growth’s sake).
We need to come together as a field.
Despite the best efforts of NNFS since 2004, the Fiscal Sponsor Conversations, and Social Impact Commons over the last five years, our field is at least 40 years behind in organizing and field building. This constitutes a present vulnerability, but also an opportunity to leverage this moment to build a more unified voice, one that all three organizations are currently working to advance.
Together, we can be a source of strength and hope for our communities in the dark days ahead.