How do fiscal sponsorships and passthroughs work in U.S. nonprofit funding and why do they complicate transparency?
Executive summary
Fiscal sponsorship lets an established 501(c) nonprofit extend its legal and financial infrastructure to a project so the project can accept tax-deductible gifts and operate without forming its own charity; while this model expands capacity and reduces start‑up friction, the variety of legal structures and the use of “pre‑approved grant” or conduit arrangements create layers of accounting and legal separation that can obscure who controls money and activities, complicating transparency for donors, regulators, and the public [1] [2] [3].
1. What fiscal sponsorship actually is and why organizations use it
At its core a fiscal sponsor is a nonprofit that provides fiduciary oversight, financial management, and administrative services so individuals or groups can run charitable projects without creating a separate 501(c), a practice driven by the burdens of forming and operating an independent charity and by funders’ desire for efficient back‑office support [1] [4] [3].
2. The main models and how money flows in practice
The sector recognizes different models—most prominently Comprehensive or “Model A” (the project becomes a program of the sponsor) and Pre‑Approved Grant or “Model C” (the sponsor makes grants to preapproved projects)—and each model imposes distinct legal relationships: Model A folds project finances into the sponsor’s books under direct oversight, while Model C relies on the sponsor’s exercise of “discretion and control” to avoid being a mere conduit; failing to exercise that control risks creating a prohibited pass‑through arrangement under IRS rules [2] [5] [6].
3. Why passthroughs and layered arrangements complicate transparency
When sponsors act as intermediaries—especially in Pre‑Approved Grant relationships or in complex multi‑entity structures like disregarded‑entity models—the allocation of funds, the sponsor’s fees, and the degree of operational control can be obscured from public filings; fiscally sponsored projects themselves are not always required to file standalone disclosures, so external stakeholders may find it difficult to trace resource allocation or governance from IRS filings alone [2] [7] [3] [8].
4. Legitimate benefits that temper the transparency concern
Fiscal sponsorships provide clear, immediate benefits—speeding program launch, shielding small projects from compliance risks, consolidating HR and payroll, and serving as a refuge for projects under legal or reputational stress—advantages widely noted by practitioners and networks that argue sponsors expand civic capacity and reduce barriers for under‑resourced initiatives [9] [10] [4].
5. The risks, documented abuses, and the politics around scrutiny
Critics argue the same structures that provide flexibility can be used to shield controversial or political activity, retain projects indefinitely without independent oversight, and channel government or donor funds with limited public accounting; watchdogs and commentators warn of inefficiency and insufficient disclosure particularly when sponsors accept taxpayer dollars or when large sponsors retain most projects long‑term, a point that prompts debate over whether fiscal sponsorship can be used to avoid transparency rules [8] [11] [7].
6. Remedies, governance practices, and where reporting falls short
Best practices promoted by sector bodies call for explicit written agreements, clear accounting lines, regular public reporting from sponsors and projects, exercise of variance power, adherence to GAAP and audit standards, and funder due diligence to mitigate opacity—but even these measures depend on sponsor willingness and donor expectations, and public reporting gaps persist because sponsored projects often lack independent IRS filing requirements and because conventions around disclosure vary widely across sponsors [2] [12] [6] [13].