Less Hassle and Still Charitable: Why Projects Choose Fiscal Sponsorship

One of the big trends we've noticed in both philanthropy and international development is increasing interest in funding different and new types of organizations. For many foundations, traditional public charities are not their first choice for investment. Instead, they are turning to international networks and partnerships that bring together diverse stakeholders, innovation platforms, funder collaboratives and re-granting funds, social enterprises, and short-term projects with a handful of staff.

As a result of this, we’re seeing many funders and project leaders consider the fiscal sponsorship model, which typically entails a project or small startup being "sponsored" by a larger tax-exempt organization with an aligned mission. The larger organization handles governance, financial management, and administration for the project it has agreed to sponsor, while the project (in many cases) pursues an independent strategy with semi-autonomous staff and its own advisors.

Since the Transparency and Accountability Initiative (TAI) transitioned to a U.S.-based fiscal sponsor in 2016, we have been repeatedly asked for advice by both project leaders and program officers. We’ve also watched as the fiscal sponsorship sector has grown. In the international development field, we’re even seeing the demand for fiscal sponsorship expand to other countries, most of which do not have legal frameworks in place to accommodate such a model.

Here in the U.S., the law currently supports a variety of models. In the model used by TAI, the sponsoring organization assumes responsibility for all tax filings, financial reporting, and legal compliance, including ensuring the charitable mission and activities of the project it is sponsoring. Typically the project is expected to contribute to the sponsoring organization’s overhead, abide by its policies, and report to its management and board. The exact terms of the arrangement usually are spelled out in a memorandum of understanding (MOU). The MOU often allows the project or startup to have its own steering committee to direct its strategy.

We are frequently asked about fiscal sponsorship and wanted to share some of the things you should consider before taking the plunge. (Nonprofit leaders may also want to consider how some of these factors are shaping organizational structures in their own fields.) Based on our own experience and what we’ve heard again and again from other projects that have gone this route, below are the top factors in deciding whether to pursue a fiscal sponsorship arrangement:

• Time spent on administration. Many projects choose fiscal sponsorship out of a simple desire to focus on programming rather than governance issues or the nitty-gritty of administration (procurement, financial reporting, human resources, etc.).
• A need to be nimble and/or drive short-term impact. Fiscal sponsorship is an option for activities like art exhibitions and disaster relief efforts, both of which require flexibility and are often short-term in nature.
• Getting value from economies of scale. Overhead is always a consideration, and many projects worry that setting up their own formal organization will be too expensive and/or duplicative of other’s efforts.
• Leveraging synergies. In best-case situations, hosted projects and their sponsors learn from each other’s activities and share networking opportunities, funding information, and strategic insight.
• Balancing the interests of founders, funders, and stakeholders. Many networks and donor collaboratives choose fiscal sponsorship because member organizations are concerned about the hosting organization prioritizing its own issues and fundraising above the network’s needs.
• Qualifying for tax-exempt donations sooner rather than later. When done properly, fiscal sponsorship enables a project or startup to receive tax-exempt donations (based on the public charity status of its sponsor) more quickly than if it had decided to set itself up as a 501(c)(3).

Fiscal sponsorship is not for everyone. The San Francisco Bar Association has a nice list of trade-offs, including loss of formal control,  branding issues, potential costs, and the difficulty of disentangling oneself from such an arrangement at a later date. Let us add here that a lawyer should be consulted on many of these issues.

We also don't want to see social sector leaders be daunted by the prospect of creating a new nonprofit entity. Nathaniel Heller is among those who have argued that too many projects and startups avoid the initial work of creating an independent nonprofit organization. There are also other options for structuring certain types of projects and networks (e.g., decentralizing work across members of a network).

Before diving into all the different models out there, project leads and their supporters will want to explore what it is they need and want. In TAI's case, we scoped out and prioritized the needs of the collaborative, including issues related to governance, administration, financial management, and human resources. We recommend others do the same: nailing down what it is you really want to accomplish and what you need to do it is invaluable information for key stakeholders as they consider the options available. It also will help if fiscal sponsorship is the model you decide on, as most sponsors will be eager to know more about your needs with respect to financial reporting, vendor management, hiring, and so on.

Funders are already embracing the fiscal sponsorship model. What are the implications for the nonprofit sector long term? If more projects are fiscally-sponsored, what might that mean for more traditional nongovernmental organizations (NGOs)? From where we sit, it seems that a growing number of NGOs are trying to capture the spirit of fiscal sponsorship with initiatives of their own, especially international NGOs, where the demand for fiscal sponsors who can hire international staff is great.

For their part, nonprofit leaders need to be aware of this trend and consider its relevance for their organizations. A growth industry often generates disruptive ripple effects. Pay attention to how new pilots, startups, networks, and collaborations in your issue area are being structured and how those changes might be shifting donor expectations. Are there ways to take advantage of these changes by offering sponsorship opportunities to others? Is there an opportunity to take advantage of the expertise and experience of another organization to incubate a new idea, spin out a project that has gained some traction but needs more support to generate impact, or create something with a fixed timeline? Maybe you’re just tired of the never-ending struggle to pay the rent and keep the lights on and are ready to let someone else worry about fundraising while you devote yourself to the cause or mission. If any those sound familiar, then fiscal sponsorship is a model you may want to consider.

Michael Jarvis is executive director of the Transparency and Accountability Initiative, a global funders collaborative committed to building a more just, equitable, and inclusive society. Jenny Lah is an independent consultant who specializes in strategy, research, and organizational development, mainly in the international development sector. She has consulted with TAI as well as several other international networks on fiscal sponsorship and governance issues. Please note: the material above has not been reviewed by a lawyer. Organizations considering becoming or using a fiscal sponsor should get advice from an attorney with experience in nonprofit law.