Fiscal sponsorship in California lets a project without its own tax-exempt status raise tax-deductible donations through an established 501(c)(3), and running one means satisfying the IRS, registering with the California Attorney General, and keeping state tax-exempt status current with the Franchise Tax Board. The sponsor is the charity of record. The project is either part of the sponsor’s own organization or a separate entity receiving regranted funds, and that choice shapes nearly every obligation that follows.
Model A or Model C
Most arrangements use one of two structures. Under Model A, comprehensive fiscal sponsorship, the project becomes an internal program of the sponsor. The sponsor owns the project’s assets, controls its bank accounts, and carries full legal responsibility for everything the project does. Staff working on the project are the sponsor’s employees. If the project is sued, the sponsor is the defendant.
Under Model C, a pre-approved grant relationship, the project keeps its own separate legal identity, often as a non-exempt corporation or unincorporated association. The sponsor receives donations and then regrants them to the project after confirming the money will be used for charitable purposes. The project runs its own operations, hires its own staff, and handles its own liabilities. Project leaders get more independence; the sponsor gets a narrower role and less exposure.
The IRS Discretion and Control Rule
The entire structure depends on one rule: the sponsor must retain genuine discretion and control over every dollar donors contribute. Revenue Ruling 68-489 allows a 501(c)(3) to distribute funds to a non-exempt project without jeopardizing its own exempt status, but only if the sponsor controls how those funds are spent and ensures they further its own exempt purposes.1Internal Revenue Service. Rev. Rul. 68-489, 1968-2 CB 210
If the IRS concludes the sponsor is passing money through without real oversight, the arrangement collapses into a conduit transaction. Donors lose their deductions, funding dries up, and the sponsor’s own exempt status is at risk. In practice, the sponsor has to review and approve how project funds are spent rather than rubber-stamp requests, keep the contractual right to redirect or withhold funds if spending drifts, and document every grant decision. The risk is sharpest in Model C, because the project operates independently and the paper trail is the main evidence of control.
What the Sponsorship Agreement Needs to Cover
A written agreement is the backbone of the relationship and the document that proves to the IRS that the sponsor retains the required discretion and control. A few terms matter most.
Administrative fees. Sponsors charge a percentage of revenue to cover overhead, often roughly 5% to 15% of project revenue, with some using sliding scales tied to budget size. Model A sponsors that handle payroll, accounting, and legal compliance tend to charge more than Model C sponsors whose role is limited to receiving and regranting funds.
Financial reporting. The agreement should set how often the project reports to the sponsor and what detail is required. From the IRS’s perspective this reporting is not optional; it is how the sponsor demonstrates ongoing control.
Intellectual property. Under Model A, assets created during the sponsorship typically belong to the sponsor, because the project is legally part of the sponsor’s organization. The agreement should say so and address what happens to those assets if the relationship ends.
Termination and asset transfer. Either party should be able to end the arrangement under defined conditions. When a project obtains its own 501(c)(3) status and leaves, the sponsor can close out the fund and grant remaining net assets to the new organization as a final exercise of its discretion. If the project has employees, the agreement should address whether accrued leave will be paid out by the sponsor or assumed by the successor.2Fiscal Sponsorship. Transfers in and out
Employees and Liability Under Model A
Sponsors often underestimate what Model A means in practice. Any paid staff working on the project are employees of the sponsor. The sponsor appears on their W-2s, withholds and remits payroll taxes, carries workers’ compensation insurance, and complies with California employment law on their behalf. Unpaid workers are the sponsor’s volunteers. The sponsor bears total liability for the acts of those employees and volunteers while they carry out project activities.3Fiscal Sponsorship. The Models – Summary
Under Model C, the project is a separate entity and employs its own workers. The sponsor does not take on employer obligations or direct liability for the project’s staff. That split is one of the main reasons some sponsors prefer Model C, particularly for higher-risk activities or a large workforce.
Registering With the California Attorney General
Before a fiscal sponsor solicits or receives any charitable funds in California, it must register with the Attorney General’s Registry of Charitable Trusts. Government Code section 12585 requires every charitable corporation, unincorporated association, and trustee to file an initial registration within 30 days of first receiving property, and the filing must include the organization’s governing documents such as articles of incorporation and bylaws.4California Legislative Information. California Government Code 12585 The initial registration fee is $50.5Legal Information Institute. California Code of Regulations Title 11 300 – Initial Registration
Annual Filings With the Attorney General
Once registered, the sponsor files annual reports under Government Code section 12586.6California Legislative Information. California Government Code 12586 The main annual filing is Form RRF-1, due no later than four months and fifteen days after the end of the organization’s accounting period. For calendar-year filers that means May 15. The RRF-1 must be filed with a copy of the IRS Form 990 (or 990-EZ or 990-PF) as submitted to the IRS, including attachments and schedules except Schedule B. Organizations below the 990-EZ threshold attach Form CT-TR-1 instead.7California Department of Justice. Form RRF-1 – Annual Registration Renewal Fee Report
The renewal fee is tied to total annual revenue:
- Under $50,000: $25
- $50,000 to $100,000: $50
- $100,001 to $250,000: $75
- $250,001 to $1 million: $100
- $1,000,001 to $5 million: $200
- $5,000,001 to $20 million: $400
- $20,000,001 to $100 million: $800
- $100,000,001 to $500 million: $1,000
- Over $500 million: $1,200
These fees are set by California Code of Regulations, title 11, sections 301 through 310.7California Department of Justice. Form RRF-1 – Annual Registration Renewal Fee Report
Franchise Tax Board Exemption and Annual Return
Attorney General registration is only half the picture. The sponsor also needs California state tax-exempt status from the Franchise Tax Board. A sponsor that already holds an IRS determination letter recognizing its 501(c)(3) status can apply for California exemption using Form 3500A. Organizations without federal exemption, or whose exemption was previously revoked, must file the longer Form 3500.8State of California Franchise Tax Board. Charities and Nonprofits
Once exempt, the sponsor files annually with the FTB. Organizations with gross receipts normally greater than $50,000 file Form 199, the California Exempt Organization Annual Information Return. Those at or below $50,000 can satisfy the requirement by filing the shorter FTB 199N, California’s version of the federal e-Postcard. The FTB grants an automatic six-month extension for filing, though the extension does not cover any tax that might be owed.9State of California Franchise Tax Board. Annual and Filing Requirements – Charities and Nonprofits
What Happens If Filings Lapse
Missing these filings is not just administrative. When a sponsor fails to submit complete filings for a fiscal year, the Attorney General changes the registry status to Delinquent. If the delinquency is not cured, the status progresses to Suspended and then Revoked. An organization that is delinquent, suspended, or revoked on the Registry of Charities and Fundraisers may not operate or solicit donations in California.10State of California – Department of Justice – Office of the Attorney General. Delinquency
For a fiscal sponsor that prohibition is severe. Every project relying on the sponsor to receive donations is cut off, and new contributions cannot be accepted. Losing tax-exempt status can also trigger an $800 minimum franchise tax from the FTB, plus interest.7California Department of Justice. Form RRF-1 – Annual Registration Renewal Fee Report Restoring good standing requires filing all overdue returns and paying any outstanding fees or penalties.
Donor Acknowledgment Letters
Because the fiscal sponsor is the 501(c)(3) that receives the donation, the acknowledgment letter has to come from the sponsor, not the project. The IRS requires a written acknowledgment for any single contribution of $250 or more. It must include the sponsor’s name, the dollar amount of cash contributions, a description of any non-cash contributions, and a statement about whether goods or services were provided in return.11Internal Revenue Service. Charitable Contributions – Written Acknowledgments
If the project sends its own thank-you letter with tax-deduction language but is not itself a 501(c)(3), that letter does not satisfy IRS substantiation and the donor can lose the deduction. The sponsorship agreement should establish who issues acknowledgment letters and what they say, so donors are not left scrambling at tax time.
If You Use a Commercial Fundraiser
Sponsors that hire a commercial fundraiser to solicit donations trigger a separate layer of rules. Every commercial fundraiser must register with the Attorney General before soliciting in the state and renew annually by January 15, with a $500 fee and a $25,000 surety bond posted in the registrant’s name. The fundraiser also files a notice of intent before each solicitation campaign and submits annual financial reports by January 30.12New York Codes, Rules and Regulations. California Code of Regulations Title 11 313 – Registration, Annual Filing, and Notice Requirements Even when the sponsor handles its own fundraising, any solicitation must include a disclosure that the organization’s most recent financial report filed with the Attorney General is available upon request. That applies to written solicitations, online campaigns, and direct-mail appeals.