How Fiscal Sponsors Can Help Nonprofits Survive Political Threats

The current Administration's chaos-causing strategy to “flood the zone” with threats of major cuts and policy changes will cause real harm to nonprofits trying to make the world a more just place.

The threats against nonprofits are numerous and at this point well-known. There are efforts to withdraw or eliminate government funds; continued concerns about a successor to HR 9495, the so-called “Nonprofit Killer” bill, passing in Congress in the coming months, or the use of existing laws to revoke tax-exempt status; and increased surveillance, investigations, and legal warfare on DEI and other civil society practices.

These threats are all meant to deplete our resources and our energy. As they multiply, survival will require more than just resilience; it will require new structures of support.

Fiscal sponsorship is a critical tool for safeguarding nonprofit work in an increasingly hostile environment. By providing legal shelter, financial stability, and strategic flexibility, fiscal sponsors can help organizations weather the storm — and, in some cases, ensure their very survival.

Harboring and hindering: How fiscal sponsors can support nonprofits

First off, it’s important to note that fiscal sponsors can’t offer an impenetrable shield. Indeed, fiscal sponsors’ scale and public presence, particularly larger institutions, will draw some of the first fire.

But we can offer some means of resistance – slowing down legal and other adverse processes. Collective infrastructure is collective capacity, and collective capacity is strength in numbers, which will be essential in the months and years to come.

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: we can safely harbor, and we can legally hinder.

HARBOR

First, we can harbor nonprofits and offer some shielding from attack. As volatility in our sector increases, sponsors can be virtual safehouses for vulnerable organizations.

In addition to providing core shared management support and other resources, sponsors can offer projects the ability to calibrate their public visibility, while ensuring those projects remain fully compliant with accounting, taxes, and charitable laws and regulations. 

Sponsors can also act as a refuge for the work of standalone nonprofits under attack, and sponsored projects may need to spin and move to other sponsors to evade threats.

Multi-entity fiscal sponsorship structures, such as Model “A-L”, which houses the project in a sole-member charitable LLC subsidiary, can offer greater portability for a sponsored project if it needs to pick up and move, change its identity, or even exit the nonprofit sector to private status to evade doxxing and lawsuits. 

HINDER

Second, we can legally hinder attacks or soften the initial blow and buy time to regroup and plan a defense or counter-offensive. While there is no absolute shield from a legal or reputational challenge, there are a few approaches fiscal sponsors can take.

First, fiscal sponsors can use various structures, in particular those that manage multi-entity structures (Model “A-L” Disregarded Entities and affiliated (c)3 and (c)4 structures), can help allocate legal risks, for both projects and sponsors, and potentially delay or complicate challenges. (Though the added cost and complexity for setting up these multi-entity structures may be prohibitive for many smaller sponsors).

Another approach is for fiscal sponsors to pool resources to respond to legal and public reputational attacks, supporting legal defense and crisis communications needs of projects – something that a smaller free-standing nonprofit would be more challenged to accomplish.

Finally, fiscal sponsors can act as a shield by managing private donations. As more givers may want to fund under the radar, we are likely to see grantmaking through DAFs as well as via more unrestricted grantmaking to sponsors for projects that are politically targeted. Normally, grants to a fiscal sponsor are restricted to the project–it is named in the grant agreement. But a grantmaker could make an unrestricted grant to the sponsor, and provided there are clear internal communications between the sponsor and project, the sponsor could simply allocate the unrestricted grant to the project internally, thus allowing the funder to not list the project by name in their reporting to the IRS.

We are also likely to see more projects operating under taxable entities and using Model “C” fiscal sponsorship where, a 501(c)(3) sponsor receives contributions on behalf of the project, assuming full compliance and fiduciary responsibility for them, and then re-grants the funds to the individual or entity doing the charitable work. 

‍How fiscal sponsors should prepare 

^‍If fiscal sponsors intend to help by either harboring or hindering, it’s vitally important that our own houses be in order.

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 may incite doxxing and trolling of both sponsors and project leaders.

In other words, what might have been a small oversight or minor compliance infraction before January 2025 could now be a significant vulnerability – a crack in the edifice that can now be used by our opponents to tear the whole thing down.

Here are eight things fiscal sponsors can do right now to mitigate risks. Make sure:

1. 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.
   
   
2. 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.
   
   
3. You’re practicing sound, accrual-based fund accounting and know current revenues, expenses, and net assets for all individual sponsored projects, as well as how much Liquid Unrestricted Net Assets you have for your sponsored project portfolio as distinct from the rest of your organization’s activities.
   
   
4. You maintain and enforce document retention, financial, 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 sponsored projects.
   
   
5. You engage in ongoing analysis of your sponsored project portfolio and have defined or made financial contingencies. 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 forrecision terms.
   
   
6. 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.
   
   
7. Projects are trained 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.
   
   
8. You’ve assessed your cybersecurity vulnerabilities, protecting your data and tightening policies around use of internal and external online forums and communications channels. Scrubbing your website or other communications of targeted language at this point is likely futile, because, as the old saying goes, “nothing dies on the internet.” If you become a target, cosmetic changes won’t help. If anything, they might alienate constituents, whose support you will need.

Once you’ve taken these eight steps, take the final and most important one: keep showing up and getting the work done. Fiscal sponsors can help nonprofits continue to be a source of strength and hope for our communities in the dark days ahead.

Thaddeus Squire is Chief Commons Steward at Social Impact Commons, and has more than 25 years of experience in the nonprofit management field. He also has a Substack, The Undersector.