06 February 2012

Your Nonprofit: Ready for Take-Off or About to Crash & Burn?

Photo Courtesy of NASA.gov
Fiscal Sponsorship for
Wannabe & Transitioning Nonprofits

Are you the founder or idea person behind a wannabe nonprofit organisation?  Is your fledgling nonprofit poised and ready to raise funds, but lacking legal nonprofit status?  Are you the designated hitter for the turnaround of an existing nonproft that's drowning in a quicksand of legal, financial, and operational troubles?  Fiscal Sponsorship may be the solution you need.

Although Fiscal Sponsorship arrangements have existed for two or more decades, better models for legally accepting and directing monies to devastated populations emerged between Hurricane Katrina in 2005 and the 2010 earthquake in Haiti.  Ordinary citizens and businesses used internet crowd-funding and SMS (text message) donations to quickly amass funding, but soon discovered forming traditional nonprofit organisations to legally accept, manage, and deliver the tax deductible donations required involuted delays.

The financial and legal arrangement known as "Fiscal Sponsorship" (FS) makes it possible for a fledgling nonprofit organisation (i.e., NPO) to raise funds and launch its mission, while undergoing the sometimes arduous process of securing nonprofit corporation status, well before an organisation achieves its full legal status as an NPO, or even on a short-term emergency basis.

The shelter and oversight of fiscal sponsorship also works well for existing nonprofits mired in dramatic financial and legal exigencies caused by negligent board governance or sloppy executive management.  An organisation’s community or remaining supporters and clients want the NPO to survive because it serves an otherwise neglected need, but only swift, significant action will solve the organisation’s problems and satisfy its governing authorities and contractual obligations.  This is a transitioning nonprofit, one that must act with haste and exacting due diligence.

Over the several years and organisations I’ve recommended or employed Fiscal Sponsorship (FS), I’ve found reliable and thorough resources about FS and its various models and methods. Which model of FS you select should be based on the volume & type of funding you expect to seek, your nonprofit's mission, and the laws in your state which govern nonprofits.
Food Justice Collaborative, a community garden, is a project under the
Fiscal Sponsorship of the Working Group for a Grassroots Movement

Definitions and Models for Fiscal Sponsorship

● Fiscal Sponsorship is defined generally here, here, here, and here.  Each organization's definition and range of different FS models will vary according to their individual aims and experience.  E.g., Model F, the structure for Technical Assistance, might seem exotic and obscure to a sponsor unaccustomed to sponsoring agencies needing those services.

● There are 6 main models of Fiscal Sponsorship:

  • Model A - The Direct Project - The most popular model of Fiscal Sponsorship for emergency fundraising for disasters, short-term projects, and fledgling nonprofits who need incubation time.  The project is closely allied to the fiscal sponsor's mission and the staff are defined as employees of the FS.  Model A affords the least financial independence but the most support and guidance from the hosting sponsor.
  • Model B - Independent Contractor Project - Although the project may appear to outsiders to be part and parcel of the FS's mission, it is a separate entity/project and its operators are classified as independent contractors.  Model B affords slightly more financial and operational independence from its hosting sponsor.
  • Model C - Grantor-Grantee Project (a/k/a "re-granting") - This model is the trickiest of the lot and the one most fraught with pitfalls, yet, Model C and A are the most commonly used structures for Fiscal Sponsorship.  While it could appear to work best for a fledgling or transitional organisation seeking to fast-track a sponsor-grantor who will help it project a mature identity to its community, all while offering a fully operational infrastructure in the least amount of time, the mechanics of funds acceptance-&-disbursal can get muddled and misinterpreted internally and result in the IRS revoking its 501(c)3 status.  Scrupulous nonprofit accounting is always a given, but Model C Fiscal Sponsorship agreements must meticulously spell out all details and be stringently administered.  Furthermore, the project must maintain its own legal, tax, and accounting identity.  In other words, for a nonprofit start-up or turnaround wanting to accept tax-deductible funds from individual donors, foundations, or government agencies, what looked at first like a quick and easy path can suddenly become a minefield, so tread carefully.
  • Model D - Group exemption or the Diocesan Paradigm - Your local Episcopal parish church is an excellent example of a Model D Fiscal Sponsorship.  Most U.S. Episcopal/Anglican parishes are actually Model D affiliates, little more than "subordinate projects" under the sponsorship of their governing diocese.  As Fiscal Sponsor, the diocesan corporation or its national ruling authority (usually, but not always PECUSA), obtained "nonprofit status with federal group exemption".  In turn, the sponsoring diocese confers this nonprofit status to its parish churches and to other projects like independent campus ministries, conference centers, schools of theology, etc..  Although the Diocese (Fiscal Sponsor) typically leads the creation of new parish/church/affiliates, it is not unknown for members of a specific geographical area to petition its Diocese for the creation of a new parish.  In Episcopalian/Anglican churches, its Canons, Constitutions, and other legal instruments, together with state and federal laws ruling religious nonprofits, embody the Fiscal Sponsorship agreement between the diocese, PECUSA, and the parish.  The Canons and Constitution also enumerate or strongly suggest the parishes' financial and administrative duties to their governing Diocese and parent .  For example, in lieu of a Fiscal Sponsorship fee, a local parish church pays an annual levy known as an "assessment".  The exact formula for the assessment varies, but the formula's base begins with cashflow statements and self-audits filed annually with the diocese.  Every contribution you make to your local parish -- for altar flowers, re-upholstering the pews, building a recreation center, the Sunday plate, or in memoriam of a loved one -- are all subject to this assessment fee.  In the for-profit world, the annual assessment resembles a franchise fee or management fee:  in exchange for an official relationship with the parent organisation (PECUSA & the regional diocese), use of the parent brand name (Episcopal), access to its "trade secrets", materials, influence and brand recognition, administrative protocols (liturgy, liturgy, hymnals, & more liturgy), official documents, advice, and supervision, the local parish pays an assessment.
[Nota Bene:  One big difference between the Diocesan Paradigm and normal Model D Fiscal Sponsorships:  your local parish church, whether in existence for one year or 150 years, does not own the land or the building it occupies.  Neither does it own the furniture, accessories, equipment, appliances, or liturgical objects used.  It all belongs to the Fiscal Sponsor, i.e., the governing diocese and PECUSA.  In the event your friendly local diocese closes a parish for "non-performance", or, if the parishioners elect to leave PECUSA's fiscal sponsorship and seek religious oversight from another authority, all monies, goods, and property revert to the diocese.   For an in-depth discussion of the continuing debate of church property issues, read about the Dennis Canon and this article in Virginia Law Review

As for other nonprofits operating within the Model D FS agreement, the project/affiliate pays their sponsor the fee defined in the agreement; all other property and proceeds belong to the project, to fulfill its mission.

Aspirationtech in San Francisco is an example of a "grantor" or Fiscal Sponsor who uses Model C.   Their website offers a simple, thorough presentation of resources to help fledgling/transitional organisations consider its options.

  • Model E - Supporting Organisation - Nearly identical to Model D, with the exception that "the Supporting Organization applies for it own 501(c)(3) status, but does not need to show public support since its public charity status is derived from its relationship to the sponsor under Section 509(a)(3)."  Likely candidates for Model E are university endowment funds and organizations that provide essential services for hospital systems.
  • Model F - Technical Assistance - The project has its own 501(c)(3) status and all funds are raised and spent in the name of the project; the project may provide below-cost entertainment, science, research, data, or technology services to the Fiscal Sponsor.  The sponsor, in turn, provides financial management assistance like payroll, bookkeeping, tax returns, and other administrative details.  A good example of a Fiscal Sponsor using Model F is the Center for Traditional Music and Dance, NYC.
For extremely short-term, one-time, or "seasonal events, such as festivals, craft demonstrations, art shows, workshops, seminars, conferences, or poetry readings," conducted within a relatively short period of time in name only/umbrella groups can be used.

One of the most authoritative legal descriptions of Fiscal Sponsorship models, arrayed from least to most amount of fiscal independence supported by each style, is wonderfully detailed by attorney Robert A. Wexler in this document (esp. pp. 5-11).

Finding the best fiscal sponsor for your project is no less important
than having the right theatre for a stage production.  It can profoundly
affect the image and delivery of your mission.

Finding the Right Fiscal Sponsor

For a basic introduction to Fiscal Sponsorship from the perspective of a nonprofit organisation which itself acts as a fiscal sponsor, see the Fractured Atlas website.  They do a good job of explaining how an FS arrangement would work between them and a project or organisation they "umbrella".  (Nota Bene: I am not familiar with this particular NPO, so don't consider this an endorsement.)

The Fiscal Sponsorship Directory lists nonprofit groups willing to act as hosts/umbrellas/sponsors.  The directory entry for each organisation summarises their approach; for example, check this information by the Community Council of Greater Dallas.  They enumerate the types of "initiatives" (meaning projects and would-be NPO's) they consider good candidates, a list of the services they provide, and their basic fee.

FS Fees and Agreements

Ah, yes, the fee!  Most FS partners charge a fee, based on all or some of these criteria:

● A set percentage for the dollar amount of funds handled or "banked";
● A percentage or overage fee for the volume of funds (E.g., will your NPO receive lots of little checks from individual donors, a few big checks from foundations, or a predictable blend of both?)
● The specific handling/operations services provided;
● Management guidance or consulting services to the ED &/or Board of Directors.

To formally signal the change from your current pre-development or transitional phase to whichever of the Fiscal Sponsorship models you have elected to use, you/your organisation will need a written, signed agreement with your Sponsoring NPO, detailing --

● the length and terms of the arrangement;
● the protocols and formulae to be applied to the provision of services;
● the specific goals your NPO plans to achieve internally and as a result of its relationship to its Fiscal Sponsor.

Once you have a compatible and amenable "umbrella" NPO + the right Fiscal Sponsorship agreement, you and your board of directors can conduct fund raising and provide services to your clientele while you await the "final determination letter" from the IRS/U.S. Treasury Dept.  If you are a transitioning NPO, your Fiscal Sponsorship agreement will also include highly specific legal and financial benchmarks which must be met -- and by what dates -- before a full restoration of the NPO is considered complete.

It isn't unusual for fresh-out-of-the-box NPO's to extend their sponsorship agreement beyond the originally agreed date, even after their legal nonprofit status is achieved. Under the right conditions, extending Fiscal Sponsorship enables the executive director, board, and overall organisation more time to build financial stability, operational consistency, and the trust of the community -- three factors essential to an NPO's continued existence.

Examples of Fiscal Sponsorship

Let's use a Daycare Center as an example of a would-be nonprofit organisation. The Daycare Center might operate on a church campus with a two-part agreement:

(1) a simple "tenant to landlord" relationship with the church's nonprofit corporation, with the church acting as the Center's Landlord;

(2) the church's nonprofit corporation may also act as the Daycare Center's nonprofit umbrella and "banker": funds and donations are named to the church but earmarked by donors -- and the written agreement -- as designated for the Center.

The Daycare Center could also operate on other, separate premises, apart from their Fiscal Sponsor, yet arrange to receive Fiscal Sponsorship from the church -- or from any willing, compatible NPO. Depending on a nonprofit's mission and operation, it might be convenient to be physically proximate to your Fiscal Sponsor, but it is not a requirement.

For a look at how real-life Fiscal Sponsorship works between an "umbrella" NPO and a fledgling group, read "How fiscal sponsor works with OWS and AfGJ" and this recent article about a Philadelphia food pantry that benefitted by a FS arrangement.

Compatibility Matters!
(This image is from the amazing mind of Ivan Boulinatchov.)
Compatibility Matters!

One final thought as you embark on your exploration of Fiscal Sponsorship -- don't downplay the compatibility factor! 

Joint venturing with another nonprofit organisation, particularly one acting as your financial handler and virtual partner, is a decision to make with great care. A willing Fiscal Sponsor doesn't necessarily equal the best Fiscal Sponsor.

If you need more guidance or information, contact me. We’ll set an appointment, get down to business, and make a success of your nonprofit.

See you on the patio!

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