Q&A #71 – What’s the difference between Model A and Model C fiscal sponsorship?
Question: My nonprofit organization has been asked to serve as fiscal sponsor for a grant to a new entity that does not yet have 501(c)(3) status. We have been told that there are different ways to approach fiscal sponsorship, including “Model A” and “Model C.” What’s the difference between these two fiscal sponsorship models?
Answer: There are many different models of fiscal sponsorship. Model A and Model C are the most common. In Model A, the charitable project is carried out directly by the fiscal sponsor and the people who operate the project are employees or volunteers of the fiscal sponsor. The closely related Model B is very similar, except the people who operate the project are independent contractors of the fiscal sponsor rather than employees. In contrast, in Model C the fiscal sponsor has a more limited management role that is generally limited to receiving and disbursing grants in furtherance of the charitable project.
The names of these different models were coined by Gregory Colvin in his excellent book, Fiscal Sponsorship: 6 Ways to Do it Right, and the “Model A” vs. “Model C” terminology has since become generally accepted in the nonprofit field. Each model has very different characteristics and implications.
Model A is sometimes called “direct” or “comprehensive” fiscal sponsorship, which captures the fiscal sponsor’s more in-depth role. In this model, the charitable project funded through the fiscal sponsorship is simply considered one of the fiscal sponsor’s own programs. Thus, the fiscal sponsor is responsible for staffing the project and would be accountable for any liabilities that arise in the course of operating the project. This model is typically used when the project by itself has no separate formal structure of its own, such as a nonprofit corporation or limited liability company (LLC) or when the project needs the comprehensive infrastructure and operational capacity that the fiscal sponsor can provide.
Model C is sometimes called “indirect” fiscal sponsorship or a “pre-approved grant relationship.” In this model, the fiscal sponsor’s role is to receive grants and donations earmarked for the project, and to grant (or “re-grant”) those funds in furtherance of the project. Compared to Model A fiscal sponsorship, Model C generally involves lower risk to the fiscal sponsor and less in-depth management role in the day-to-day operational details. However, note that with Model C, it is especially important to have a well-drafted fiscal sponsorship agreement that makes clear that the fiscal sponsor retains final discretion and control over decisions to grant funds to the project (including “variance power” to redirect funds to other persons or entities the fiscal sponsor deems more capable of fulfilling the goals of the project). This model is better suited to situations where the recipient organization has already established a nonprofit corporation, LLC, or other formal entity and needs less comprehensive operational assistance (although many Model C fiscal sponsors provide specialized support related to financial administration and other areas).
Planning Tip – Whichever fiscal sponsorship model you use, be aware that fundraising efforts for the project will have implications for the fiscal sponsor under state charitable solicitation registration laws. This is because solicitations for the project are, in actuality, solicitations on behalf of the fiscal sponsor. Therefore, it is important to make sure that the fiscal sponsor is registered in all states in which fundraising for the project will occur, and to include provisions in the fiscal sponsorship agreement giving the fiscal sponsor rights to review and control fundraising solicitations.
In summary, the decision whether to use Model A or Model C generally depends on the operational needs of the charitable project and the level of risk and control the fiscal sponsor organization is willing to accept.
