Steven Chiodini and Greg Colvin have published an article in Taxation of Exempts this summer that explores a possible new “Model L” for fiscal sponsorship.
This article, entitled The Use of LLCs in Fiscal Sponsorship — A New Model, in the Thomson Reuters journal Taxation of Exempts, May/June 2011, is available on the Adler & Colvin website.
Some 501(c)(3) public charities that use the Model A direct project approach have been concerned about their exposure to liabilities created by operation of the project–use of automobiles, disgruntled employees, programs involving children, outdoor sports, and the like. There is a way to contain those risks while maintaining the tax advantages of fiscal sponsorship: Place the project in a limited liability company (LLC) created under state law, controlled by the sponsor as the single member of the LLC, and treated for federal tax purposes as an integral part of the sponsoring charity. But wait: that means operating the project as a separate company out of a separate bank account in the LLC’s name and potential state tax law compliance issues, so this is not a solution in every case. However, if the risks and the volume of financial activity justify the additional administrative burdens, it’s worth a look.