Model C fiscal sponsorship, also known as a pre-approved grant agreement or “grant relationship” fiscal sponsorship, gets a bad rap before you even finish reading about it. Greg Colvin’s foundational text opens the Model C chapter by calling it “widespread and sometimes misunderstood” and a “trap for the unwary.”
I’ve been a part of eight Fiscal Sponsor Conversations sessions dedicated to Model C over the years, and it’s remarkable how the same handful of traps come up again and again. From the outside, it seems fairly straightforward. While Model A sponsorship provides a full back office of support, Model C (according to the smartest folks I know) is, at its core, about the charitable funds. Sounds simple, right? Well, think again.
Here’s what I keep hearing, over and over, from the staff and leaders actually running Model C programs:
The grantee is (technically) not the project.
This is one of the most common sources of confusion, and I’ve seen even experienced sponsor staff learn it the hard way. The grantee is the legal entity receiving your money, an LLC, an S-corp, a nonprofit awaiting its own 501(c)(3), or an individual. The project is the discreet charitable activity that the entity is doing with the money. They often have different names (and should). But staff, auditors, and even your own board can get confused about who is “on the hook” versus what they’re actually funding. The sponsors who get this right are deliberate about it: requiring grantees to name their charitable project separately from the legal entity itself.
“Pass-through” is not just imprecise language, it’s a legal problem.
I’ve watched sponsor staff practically flinch when they hear a prospective grantee describe Model C as money simply flowing in and out. A 501(c)(3) must exercise meaningful discretion and control over funds it receives, or it risks operating as a mere conduit. That distinction isn’t cosmetic. If a sponsor doesn’t actually exercise discretion, donors risk losing their charitable deduction and foundations risk a taxable expenditure. Think of it like the fine print in a contract that nobody reads until the deal falls apart: the language feels like a technicality, right up until it isn’t one. The fix is a written application, a written agreement, and a documented reporting process. Three things that should be 100% non-negotiable.
Earmarking sneaks in through award letters.
This is the operational trap that can catch even careful sponsors off guard. A foundation sends an award letter congratulating the sponsor on a grant “for XYZ LLC” rather than for a charitable purpose, and just like that, the sponsor’s discretion has been undermined without anyone at the foundation realizing it. Program officers often have no idea Model C fiscal sponsorship even involves this distinction. The fix that seems to work best is this: catch it in the letter, call the funder, and ask them to reference the purpose or mission rather than naming the grantee entity.
Paying vendors directly is more common, and riskier, than people assume.
A meaningful number of sponsors pay a grantee’s contractors or vendors directly as a courtesy, often to get real-time visibility into spending. Attorneys I’ve talked to are consistent in their warnings: do it without carefully drafted language, and you create the appearance that the sponsor, not the grantee, holds the contractual obligation to that vendor. That opens the door to 1099 confusion, worker misclassification exposure, and liability the sponsor never intended to take on. If you want this kind of oversight, build in a documented courtesy-payment provision that explicitly disclaims any contractual relationship with the vendor.
Re-granting and sub-granting confuse people who assume “discretion” is unlimited.
Model C grantees generally cannot turn around and make grants themselves, since the sponsor loses its ability to verify the charitable use of funds once they’re a step removed. Grants to other 501(c)(3) partners can be discussed, since that’s simply a donation between charities, but the moment a non-charitable grantee wants to redistribute funds further out, slow down and ask yourself whether you can still document that a charitable outcome occurred.
None of these issues make Model C something to avoid. They just show how important it is to maintain documentation, discretion, and a healthy skepticism toward anyone, including funders, who assumes the relationship is simpler than it is.
If your Model C program is running into any of these challenges, or you want to more deeply understand this method of fiscal sponsorship, please join Erin Bradrick, Oliver Hack and me for our special workshop, “Grant Relationship (Model C) Fiscal Sponsorship: Legal and Practical Foundations” on Thursday, September 10th, 2026 at 11am PT.
