In this webinar, Gregory A. Nielsen will provide an overview of fiscal sponsorship as a tool for both existing nonprofits and groups not currently recognized as public charities.
Full Transcript:
Steven: All right, Greg, my watch just struck 2:00 Eastern here. Is it okay if I go ahead and get this party started?
Greg: Let’s do it.
Steven: All right, awesome. Well, good afternoon, everyone if you’re a fellow East Coaster. Good morning, I should say if you’re out on the West Coast or somewhere in between. Thanks for being here for today’s Bloomerang webinar, a special Valentine’s Day edition. I’m so excited. We’re going to be talking about tips and considerations for a happy fiscal sponsorship relationship, so thanks for being here. My name is Steven Shattuck, and I’m the Chief Engagement Officer over here at Bloomerang, and I’ll be moderating today’s discussion as always.
And just a couple of housekeeping items for you all before we get going here. I just want to let everyone know that we are recording this session, and I’ll be sending out the recording by email late around this afternoon. Also resend the slides just in case you didn’t already get those so if you have to leave early or maybe you want to review the content later on, have no fear, I’ll get all that good stuff in your hands today, I promise.
But most importantly, we love for these webinars to be as interactive as possible. We’re going to save some time at the end for Q&A. So as you’re listening over the next hour or so, don’t be afraid to send in your questions and comments. I’ll be keeping an eye on those throughout the hour. Don’t be shy. We want to answer your questions. So we got an expert on the topic here, and he’ll be able to stick around for at least a few minutes at the end to answer questions. So please do that. You can do that on Twitter as well. I’ll keep an eye on the Twitter feed.
And if you have any trouble with the audio through your computer speakers, we find that the audio by phone is usually a little bit better. So if you have a phone nearby and you don’t mind dialing in for audio, try that before you totally give up on us. There is a phone number that you can dial in to in the email from ReadyTalk that went out about an hour ago today. So check that out before you totally give up on us.
And if this is your first Bloomerang webinar, I just want to say an extra special welcome to you folks. We do these webinars just about every single Thursday afternoon. We literally only miss a couple of weeks out of the year. We bring on a great guest presentation, always really good topic, good speaker, good content. It’s one of my favorite things we do at Bloomerang but what we are most known for is our software. We are provider of donor management software, if you weren’t already aware of that.
So if you’re interested in Bloomerang and what we have to offer, check out our website. You can watch a video demo. You can kind of get a little video tour of the software in action if you’re interested, so check that out. Don’t do that right now because you’re in for a real treat over the next hour or so. We’ve got a great guy is the best way I can put it, someone that we’ve had a relationship here with it at Bloomerang here, good to have him finally on the webinar series. We’ve got Greg Nielsen joining us from beautiful but cloudy Louisville, Kentucky. Hey, Greg. How’s it going? Are you doing okay?
Greg: Hi, Steven. I’m doing great.
Steven: I’m so happy for you to be here. Yeah, this is great and you were a good sport in letting us schedule this on Valentine’s Day. We’re going to talk about maybe not be the sexiest of topics but perhaps one that is I think very important. So it’s awesome for you to take an hour out of your day, more than an hour actually because you’ve been preparing for this to do this.
I just want to brag on you really quickly. If you guys don’t know Greg, you got to check him out. He’s the President and CEO over at Nielsen Training and Consulting. He works with a lot of organizations specifically leadership and boards to improve the things that they’ve got going on.
Speaking of boards, he has the BoardSource Certificate in Nonprofit Board Consulting so he is definitely qualified to help out on the board side. You may have seen him or probably will see him on the conference agendas. He gets around and speaks a lot on leadership and governance for sure.
And how we know Greg is when he was the CEO over at the Center for Nonprofit Excellence where he really helped grow that organization and then got it to a good spot before moving on to his current gig. Also has a really great podcast, I’m sure he’ll share a link with that at the end so that maybe something that you might want to listen to later on after you listen to this presentation.
But I’ve already taken up way too much of your time, Greg. I’m excited to hear what you have to say about fiscal sponsorships, so I’m going to turn things over to you to tell us all about it. So take it away, my friend.
Greg: Wonderful. Thank you, Steven, I appreciate it and good afternoon and happy Valentine’s Day to everybody. I am so excited to be with you this afternoon, and I really appreciate you sharing a bit of your Valentine’s Day afternoon with me. Our objective today is to learn about a relationship in the nonprofit community that is growing in popularity and that’s fiscal sponsorship. You may be an individual who has an idea to address the community challenge and you’re unsure whether starting a nonprofit is the right way to move forward, or you may be an existing nonprofit that is considering entering into a fiscal sponsorship arrangement.
Over the course of the next hour we’ll talk about how to structure this relationship so that both parties emerge successful because when done thoughtfully and with intentionality fiscal sponsorship can lead to a relationship that addresses important community challenges while avoiding duplication and unnecessary creation of new nonprofit organizations.
So before we get started, let’s just give a little bit of a roadmap of where we’re heading today. We’re starting with a definition of fiscal sponsorship because we want to get everybody on the same page relating to the terms that we’re going to be using about this relationship. We’ll talk a little bit about the pros and you see the word “challenges” there. I don’t like calling them cons.
We’ll talk about finding your match, so how an organization or how an individual if they do decide to pursue a fiscal sponsorship can find an organization that is willing to take them on. We’ll talk about a couple of different comment forms that the fiscal sponsorship takes. We’ll talk about who does what. So within the relationship, obviously, just like any organization, roles and responsibilities are critically important and we’ll talk about it in a typical relationship who does what. And then finally, how do we get engaged. So if this is a good fit for you moving forward as a nonprofit or as an individual, how do you go about getting engaged in moving forward.
So for our purposes today we’re going to keep it at a fairly high level just talking about the mechanics of fiscal sponsorship, and we’re going to talk about it from two different perspectives, so we’re kind of bounced back and forth between the one side which is the individual or the nonprofit, the individual or the group that has an idea moving forward and on the flipside the organization that may ultimately serve as their sponsor.
So before we begin, let’s talk about a few of the key terms that we’re going to use throughout. A sponsor is an existing 501(c)(3) organization, so this is an existing nonprofit that has opened itself up and said, we may be willing to lend our 501(c)(3) status to an individual or group that has an idea that’s aligned with our mission in some way.
The next key term is a project and that’s what we’re referring to when we talk about the individual or the group that’s seeking to align with a sponsor to advance their charitable purpose.
And then fiscal sponsorship model is something that you’ll see frequently if you were to Google fiscal sponsorship and that really boils down to how are we going to engage one another in a relationship. So how are we going to relate to one another, what are going to be the terms of our agreement and how should we move forward.
Again, as Steven said if you have any questions as we move through the presentation, please share them in the chat box. I promise that Steven and I are looking at that throughout out and we will get to as many of your questions as we can. We have reserved time at the end. So we will be monitoring that and look forward to your questions.
So what is fiscal sponsorship? First, it’s important to realize that fiscal sponsorship is a contractual relationship. So if you are an individual if you are an existing nonprofit fiscal sponsorship if you do move forward will result in a contractual agreement, it’ll be a written contract between the party that spells out who does what, for whom, during what term, how does that agreement come to pass and how does that agreement ultimately terminate should the parties do so. What are the fees involved?
We’ll talk at the end about some of the key terms in a fiscal sponsorship contract. It’s between the sponsor and the project so it’s between an existing nonprofit and an individual or group.
And then third it allows the project to use the tax exempt status of the sponsor to advance a charitable purpose. So looking at an example, so if I am an individual who has some great idea, and for our purposes we’ll use an example of let’s say I have an innovative way to address hunger in my community. I’ve already done the research. I’ve seen there’s not an existing nonprofit that is addressing hunger in quite the way that I want to address or I have an innovative way of addressing it in my community.
At that point I have two different options, right? I can go option A and form my own new nonprofit and I can file with the IRS. I can get my tax exempt status, go through state and federal government as well. Or, and what we’re talking about today is I can align with the fiscal sponsor and what that means is rather than forming an independent entity rather than forming a new 501(c)(3) organization I’m going to look for an existing organization that has a mission similar to my great idea and I’m going to ask if they will essentially incubate my project. Will they loan me their 501(c)(3) number, allow my project to rollup under their organization which would allowed me to pursue early impact for my idea rather than go through the mechanics of filings, setting up a board, and forming articles of incorporation, etc.
So as we talk about the key terms involved, there’s several relationships and you can see with each of the relationships the arrows go multiple directions. So in a fiscal sponsorship arrangement let’s talk first about donor and sponsor. So if I’m a donor who has built a relationship with a project, so I believe, for our example, I believe in the way they are choosing to address hunger and I want to support that project.
That project lacks the 501(c)(3) status. So if I were to make a gift directly to that project it wouldn’t be tax deductible. However, if that project was fiscally sponsored I could make a gift to the sponsor intended for the project and still received a tax deduction. The project receives the benefit of my gift. The sponsor handles the acknowledgement of my gift because it shows up on their balance sheet.
So when we talk about relationships, the project and the donor are building a relationship. That’s going back and forth just as any nonprofit would build a relationship with a supporter, with a donor. The sponsor has a relationship with the donor because they are receiving the gift and acknowledging the gift. Sponsor and project are relating to one another not only through the transfer of funds but also through a reporting mechanism. So the sponsor may request frequent reports from a project or may request additional information to ensure that the project is being run in accordance with the sponsor’s policies, procedures, and maintaining integrity.
So if that’s what fiscal sponsorship is, is this triangular relationship between donor, sponsor, and project. Let’s talk for a minute about what it is not because that’s equally important. First, it’s important to realize that the sponsor is not the legal agent of the project. Under the law of agency, an agent acts on behalf of another who has the right to direct and control the agent’s activities. Calling a sponsor a fiscal agent implies that the project controls the sponsor. To comply with tax exempt law the reverse exactly has to be true. The sponsor must be in the controlling position and the nonexempt project must act so as to further the sponsor’s exempt purposes.
The second thing it is not is a conduit relationship. So when A makes a donation to B who’s the sponsor which is earmarked for C, the project, it is in reality a donation from A to C. But if C is not exempt under section 501(c)(3), the gift is not a tax deductible contribution. To be deductible, the IRS requires the D, the sponsor have complete discretion in control over the funds and it actually holds the sponsor legally responsible to see that payments to the project furthered the sponsor’s tax exempt purposes.
So as we talk about the donor is making a gift to the sponsor intending it for the project. But in order to comply with IRS regulations the sponsors still has to maintain a level of discretion in control over the funds. This cannot be a simple pass-through arrangement.
And the third thing that a fiscal sponsorship is not is a donor advised fund. So those of you who are familiar with donor advised fund and clearly the proliferation recently of donor advised funds, the IRS has very clear and detailed regulations about those funds and a fiscal sponsorship does not fall within those requirements. Again, the most important thing to realize from this slide is that a fiscal sponsorship is not a mere conduit relationship. It is not a pass-through of funds from a donor to a project.
So what are some of the pros of this relationship? So at the outset if I’m an individual or if I’m a nonprofit who is considering fiscal sponsorship, let’s talk about some of the pros, some of the reasons why we would consider that. On the sponsor side, the project may further the mission in some way. So going back to our example of an organization that addresses hunger, there may be an innovative idea that the sponsor has not previously implemented or tried or it’s not part of their organization. The project that approaches them has that innovative idea. The sponsor may see that as the way to further their mission, further their impact in the community.
For the sponsor it’s also an opportunity to pilot innovative projects. So perhaps our sponsor doesn’t have the bandwidth or the capacity to expand their hunger-related programs in a particular way. [If 00:15:41] the project does bring that capacity, that expertise, and it gives the sponsor a chance to pilot that.
The sponsor maybe able to attract new donors through the project. Again, the project is the one that’s building relationships with the donor. So for the sponsor this may give them access to supporters, volunteers, donors, that they previously don’t have a relationship with.
It’s an opportunity for the sponsor to leverage their capacity. So as we’ll talk about later on in a fiscal sponsorship, the sponsors typically provides some administrative function that maybe payroll, that maybe accounting, that maybe financial reporting, P&L, balance sheet. It’s an opportunity for the sponsor to use some of their back office capacity to help the project, to allow the project to focus on its intended impact.
And then finally, for a sponsor it may generate revenue. So, typically when we talk about an agreement between the sponsor and a project there’s an administrative fee that is charged for a sponsor to use their 501(c)(3) number for the project, the project specifically pays the sponsor an administrative fee, and we’ll talk a little bit about how that’s calculated later on.
Some of the pros on the project side is it’s an opportunity to align with an existing nonprofit that’s a mission fit. So if I’m an individual who has an idea to address hunger in the community, having access to a nonprofit that has expertise, that has individuals on staff, that may have been doing this for an extended period of time is a great way to align my project, my idea, with an existing mission to make use of their knowledge and wisdom.
It’s an opportunity to test drive ideas. So if I’m at that idea phase as a project and I’m not quite sure about the long-term impact of my project, I’m not quite sure about the long-term viability and I’m a little weary of starting my own nonprofit, this is an opportunity to incubate my project, test drive my idea, and see if it’s a long-term fit. We can always separate from the fiscal sponsorship at a later date and form a nonprofit then but for an initial period to see the viability, to test the resources necessary and quite frankly to learn about nonprofit leadership and governance, fiscal sponsorship maybe a wonderful avenue for that.
The project has an opportunity to attract donors and grants through being able to offer a tax deduction for donors and contributions that it wouldn’t otherwise have without linking arms with an existing 501(c)(3).
I think the next one is probably the most important in that it allows the individuals associated with the project to focus on impact. So for those of you who have gone through the process of forming a nonprofit, forming a 501(c)(3), even those who are leading a nonprofit right now, you know the amount of administrative time that it takes. So between filing the articles of incorporations, forming an initial board, managing your board, filing your annual report to the Secretary of State, the Attorney General’s Office, all of those administrative functions take time away from the impact of an organization. Right?
So for individuals who has a project idea, linking arms with a sponsor who takes care of the administrative side allows that individual to focus right away on impact, right away on implementing the innovative ideas and seeing the impact that they can have on the community.
And then finally, it’s an opportunity for greater efficiency. So if I am a project and I start my own nonprofit, I’m going to be doing those same administrative functions that a sponsor is doing for their organizations. We’re both going to be duplicating those efforts whereas if I’m aligned with the sponsor in a fiscal sponsorship relationship, perhaps they take care of the HR functions for me. They take care of the accounting and the monthly financial reporting which again is a more efficient way that allows me to get out into the community and focus on what really inspires me which is the impact.
On the flipside, let’s look at some of the challenges of the arrangements, some of the things that we have to be leery of and watch out for as we go along. On the sponsor side, orientation, so we are taking on a new project as part of our organization and just like when we bring any new employee, any new contractor into the organization that requires a thorough orientation. So sponsors need to treat the project, or really should treat the project as a new employee, as a new person or piece of the organization that we’re bringing in and structure an orientation process that’s thorough and that allows the individuals associated with the project to get a good understanding of the policies and procedures of the sponsor to get the relationship off to a strong start.
Next, the sponsor needs to obviously stay current on requirements and regulations related to fiscal sponsorship. Risk management, oftentimes in a fiscal sponsorship arrangement it can feel to a sponsor as though a project is kind of out there on their own. So from a risk management standpoint it’s important for the sponsor to maintain the level of oversight and understanding of the activities of the project that allow them to mitigate risk and make sure that they’re being conducted in a way the sponsor is comfortable with.
The last two are tied together which is budget tracking and cash projection so for sponsors it’s as important as maintaining control and understanding of your existing budget and cashflow. It’s just as important to maintain an understanding of the projects budget and cashflow. To help them manage and understand have we exceeded our budget, are we proceeding the way we anticipated or do adjustments need to be made throughout the year.
On the project side some of the challenges to be aware of and when I talk to individuals considering fiscal sponsorship, one of the most important is loss of control so as you are starting out your own nonprofit there can be a level of autonomy that some people really respect and that some people are craving. When you align with the fiscal sponsor you are rolling up under not only under their 501(c)(3) but you’re also having to adapt to the way they do business. What are their policies and procedures? How do they manage employees? What are some of the reports and requirements that the sponsor may have of you as a project, so some of that loss of autonomy is something that an individual wants to be aware of as they enter into the relationship.
Second, project needs to understand clearly what are the fees the sponsor is charging? How are those fees assessed? Do they increase? Do they decrease? Are they fluctuating? Are they dependent on the growth or success of the project in some way?
And then finally it’s important for a project and the sponsor to have a thorough conversation around how does this agreement if it does terminate or spin off into a new 501(c)(3) nonprofit. So if I’m a project and I get to a point where I want to terminate this relationship or if I’m a sponsor and I choose to terminate this project, what are the notice provisions? How do we go about doing that? What rights do I have as I spin that nonprofit off? What information belongs to me? What information can I take with me?
If we do decide to move forward, if individual and existing nonprofit do decide to move forward with the fiscal sponsorship relationship, there are really five key steps to the process. So for both parties, they need to evaluate the project, and that’s just what we’ve been talking about. How is the project going to be conducted? How many staff is it going to take? What is the budget? What is the cashflow? Where will the relationships be built from?
Second step for an individual or organization, how do I find the fiscal sponsor and we’ll talk about that. Third, once I found a potential sponsor, how do I discuss the project? What are some of the key questions that sponsor and project need to ask one another?
Decide on the model, what form is that relationship going to take and for our purposes we’ll focus today on two of the most common forms. And then execute the agreement. So what are the key terms that are typically in a fiscal sponsorship contract or agreement?
So first, finding your match, so as with any relationship there are a variety of ways in which you can find your match, your mate. One of the most prominent and easily accessible ways for projects to find sponsors is through an online directory. So if you were to go to www.fiscalsponsordirectory.org, there is a listing, there’s a 50-state listing. I believe it lists potential sponsors in 33 out of 50 states currently, maybe it’s a little bit more at this point, but it allows you to see within your state what organizations have put themselves out there as being willing to entrain the possibility of serving as a fiscal sponsor.
So if I’m in Illinois, if I’m in California, if I’m in Massachusetts, I can go to that website and I can pull up a list of organizations that have put themselves out there and said, “Yes, I would be willing to entertain a conversation with a project about aligning our mission in a fiscal sponsorship.”
Often, in communities, community foundations serve as fiscal sponsors. Philanthropic foundations have occasionally incubated new ideas within their philanthropic areas of focus. Management support organizations and regional associations. So if you’re an individual or group that’s considering how, you know, where can I go to find my match, the initial spaces that I would recommend obviously the website fiscalsponsordirectory.org and then any of these that may exist in your community: community foundations, prominent philanthropic foundation, MSOs, or regional associations.
Once we found a potential match for us whether that’d be a sponsor, whether that’d be a project, what are some questions that we need to ask when we sit down across the table from one another? Before we get engaged, we want to make sure that we have a thorough understanding of each other, sponsor and project, and also how the arrangement, how the relationship will unfold?
So for a sponsor sitting down across from a project, some of the questions that I would want to ask as a sponsor are, what are the current activities and accomplishments of the project if any? Is this a complete startup? Or has the project already been conducting activities within the community without the benefit of the nonprofit status or fiscal sponsorship? Do they have any early accomplishments? What can they point to for early impact? Who benefits from the project? How well does that align with my mission and the segment of the community that I’m working with? What is their work plan? How does their . . . maybe they don’t have an existing strategic plan but how does their work plan on bold over the next period of time?
What involvement do they have from the community? What is their fundraising plan? So as we look at their activities and accomplishments, what are the resources that it’s going to take to align their project with the nonprofit organization? How realistic are the activities that they, and accomplishments that they hope to have over the next 12 months with the resources that you as a sponsor believe they’re going to have access to? What is their budget and what is the number of employees or volunteers? Sort of what is the span . . . what is the scope of their current influence?
On the project side, so as you’re sitting across from the sponsor, here is some of the questions that you want to have in your mind. First is, can they do it? So is this an organization that you’re talking to as a potential sponsor that has served as a fiscal sponsor before? How much experience do they have with this relationship? How confident are you that they can serve as an effective sponsor that delivers to you the funds that you secure in a timely fashion and represent a mission fit or alignment?
Are they stable? How long has this organization been in business? How long have they maintained the 510(c)(3)? How often have they served as a fiscal sponsor?
What do they offer? There is a wide array, wide spectrum or services offered by fiscal sponsors everything from a comprehensive back office suite of operations of HR, legal advice, administrative, payroll, etc. to really limited funds transfer and 510(c)(3) management.
And finally, will they put it in writing. It’s incredibly important as with any contractual arrangement that whatever the terms are between project and sponsor that they be in writing.
Once we have found our match and now we have engaged in that due diligence process and talked about the pros and the cons and we’ve talked about, you know, what type of information do we need to exchange between one another, what model is this relationship going to take? And the two most common, there are about six or seven different models of fiscal sponsorship out there but the two most common are what’s called model A and model C.
Model A is the most common model and it’s called comprehensive fiscal sponsorship. So if you go out and Google fiscal sponsorships, you’ll hear two terms commonly mentioned and those are comprehensive fiscal sponsorship and preapproved grant relationship. So typically, the fiscal sponsorship will take one of these two forms and let’s talk briefly and we could have a whole session just on the differences between the models, but at a really high level let’s talk about the differences between the two models.
So model A which is the comprehensive fiscal sponsorship model the sponsor owns the project. So the project is essentially a piece of the sponsor. So if we’re an existing hunger-related nonprofit organization, that project becomes a piece of the organization. So if we are the hunger-related nonprofit that project is not a separate entity once we enter the fiscal sponsorship relationship. They are rolling up under the sponsor and for the purposes of the community it is the sponsor’s project.
Second, the project is not its own legal entity. So the individual with the idea or project does not have to go out to this community and form a new separate legal entity, it is an employer-employee relationship, contractor contract, independent contractor relationship. And then the sponsor is responsible for the results. So again, under the comprehensive model the sponsor is controlling the activities of the project to an extent because the project is not its own legal entity. The sponsor is ultimately responsible for the results.
Model C is a preapproved grant relationship, so the project maintains its own separate status as a legal entity and the way the project and sponsor when the project applies for a grant from the sponsor is a grantor-grantee relationship and the project is responsible for the results because it ultimately has to still prove those results in order to qualify for the grant.
Remember, this is not a pass-through relationship so the donor who is making a gift to the sponsor intended for the project, the sponsor is still maintaining discretion and control over those funds. The project is applying for a grant for those restricted funds to qualify. So at a really high level that’s the difference between model A and model C. Again, as I mentioned typically the groups and individuals that I work with, the fiscal sponsorship falls within model A, the comprehensive fiscal sponsorship.
How do we enter into . . . what is the happy relationship look like if we’re in a fiscally sponsored relationship? There are lots of different ways that we are going to interact regardless of the model that we choose. What are some of the common aspects or common themes within the happy relationship here?
The sponsor is lending credibility to the project. So imagine for an instant that you’re an individual with a brand new idea to address hunger. It can be very difficult to attract new donors because there’s not a track record of results. However, by aligning with an existing, well-respected, well-regarded organization, the sponsor is lending credibility to the project.
The sponsor is also acknowledging gifts so in terms of maintaining, and Steven, we can talk for a long time about best practices in donor relationships and maintaining solid communication between donors. A sponsor in a happy fiscal relationship is acknowledging those donor gifts quickly on behalf of the project. The sponsor controls the flow of funds back and forth. The sponsor is requesting periodic reports to maintain the integrity of the projects and then there’s regular communications back and forth.
So if you flip over to the project’s responsibility, it’s the project’s responsibility to disclose its status to donors. So if I’m a project and I’m going out and having a conversation with a donor about my idea, my project, I need to disclose to that donor that I am in a fiscal sponsorship relationship with organization X. So that if you choose to make a gift to my project, your gift is actually going to go to this organization and they after vetting me and after we’ve entered into this relationship will provide those funds to me. So, again, we’re maintaining that understanding of that triangular relationship between donor, sponsor, and project.
The project is actively out there in the community building donor relationships. There’s an administrative fee going back and forth from the project to the sponsor. The project is providing periodic reports to the sponsor and then regular communications.
So I can’t stress enough the importance of regular communication between a sponsor and a project because you really have linked arms. The sponsor has put the integrity of its 501(c)(3) status on the line, that’s the skin that they have in the game. The project has aligned its idea, its innovation with this existing organization. They’re entered into a marriage of sorts. They’ve entered into a relationship and as with any relationship that regular communication is so critical.
What are some of the additional services that fiscal sponsors provide? Some of those services are tax preparation. So as many of you know a nonprofit annually produces the 990, does an audit, typically the fiscal sponsorship will handle all of that. Many fiscal sponsors provide bookkeeping services for the project. Insurance and extend the insurance coverage to the project which can be extremely important in the early days. HR administration if the project has employees or volunteers. Legal advice and grant reporting assistance.
So if you think of a brand new project and they want to spend it’s time out in the community having an impact, it can be really beneficial to that group in the early days and even as it moves forward to have these back office services, to have these additional services to again help them focus on impact in the community.
What about governance? So we talk about when we form . . . one of the most difficult and important challenges when a new nonprofit is formed is forming board of directors, right? Well, what happens with governance when we talk about a fiscal sponsor? Does a project need to develop its own board and if so, how does that relate to the governance or the project and the governance of the sponsor?
Very clearly it’s the sponsor’s board that governs. There is not a specific legal requirement for a sponsored project to have its own separate board. It may have an advisory council, it may have choose to have a group of advisers but ultimately, for all legal purposes, the sponsor’s board governs and tip . . . and also when it comes to oversight financial oversight, governance oversight, it’s the sponsor’s board that’s responsible for ensuring the adequate oversight of the project as well.
So we talked about some of the key considerations and due diligence and questions when it comes to fiscal sponsorship, what are some of the key contractual terms? So how do we execute an agreement, many fiscal sponsors particularly if they have been doing this for a while, they’ve been doing this for others have a standard contract that they use. These are some of the typical terms that I see in fiscal agreements. First being the incorporation status, so what is the current status of the sponsor and what will be the status of the project? Will it be the model A or model C where the project is a legal entity or is not a legal entity?
Maintenance and release of funds, so when funds are received by the sponsor how often during what interval will both be released to the project. Reporting requirements, so what does the project require of the sponsor? What does the sponsor require of the project? Support, again, what are some of those additional services? What is the fee?
The employment status of the project, are they contractors? Are they employees? Are they grantees? IP is intellectual property, so if the project develops any intellectual property who owns that, important to put that in the contract. The term, the duration, the exit provision, and then finally the insurance, so who is going to cover the insurance? What are going to be some of the liability provisions for the relationship?
Just a brief note on the administrative fee because I get asked this a lot, for the majority of fiscal sponsorship arraignments, the administrative fee is based on project budgets size. It fluctuates typically from 1% to 15% of project assets. The average, nationally, the last time it was calculated was right around 5.6%. So if you’re a project that’s considering aligning with the fiscal sponsor, you can expect depending on how robust the services are from the sponsor to the project, a fee anywhere from 1% to 15% with an average around 5.6%. One of the things that bumps up that fee typically is there may be a higher fee for administering government grants just because of the amount of paperwork, the amount of administrative functions. Those of you that deal with government grants, I don’t need to tell you anymore about that I’m sure.
For those who are considering a fiscal sponsorship I do want to share with you a sample agreement that exist online. It comes from the Colorado Trust. You can capture it at that website, it’s www.coloradotrust.org and then everything after the slash there that provides a sample of fiscal sponsorship agreement. Again, they can take many different forms but I have seen agreements that are quite similar to the ones listed there in the Colorado Trust.
We’re about to wrap up and take some questions, but before we do I just want to share at the end some trends in fiscal sponsorship relationships. So as I mentioned at the outset, this is a relationship that is growing in popularity, growing in recognition, growing in use, and as a result, I’d like to share just some of what I see in the landscape when it comes to sponsors and projects.
As I mentioned, greater awareness, so whereas 5 years, 10 years ago I was not seeing nearly as many questions, nearly as many groups considering a fiscal sponsorship. Tremendous growth of awareness in fiscal sponsorship as a vehicle to advance impact and also to avoid the duplication of creating new nonprofits.
Flexibility, I see a lot more flexibility when it comes to fiscal sponsorship relationships, how detailed, how comprehensive is that relationship versus how limited it is.
Professionalization of services, whereas in the past we used to see fiscal sponsors providing really basic monitoring, reporting, financial management services, there’s now a trend towards the professionalization of those back office functions. For sponsors this can be away to generator additional revenue and, again, leverage some efficiency and expertise that they have in those back office functions.
We’re seeing an increase in term length, so in the past we used to talk about physical sponsorship mostly as a vehicle for incubating new nonprofits, that a new individual or group would enter into a fiscal sponsorship relationship for a short period of time until they got the mechanics together to form their own nonprofits. We’re now seeing individuals in groups that remain in fiscal sponsorship relationships for longer periods of time or indefinitely because it just makes more sense for them.
There’s a focus on networks so as an individual or project being really strategic when it comes to aligning with a sponsor and thinking about what access does that sponsor have to donors, philanthropic foundations, or others that might advance the work of my project.
Heightened credibility, principally from foundations. Foundations are concerned about the proliferations of nonprofits and are starting to give a significant amount of credibility to fiscal sponsorships as a vehicle to avoid duplications and promote collaborations and as I’m mentioned period of growth as well.
Before we wrap up and take your questions, I do want to invite you, as Steven mentioned, at the outset to engage with me. I have formed my company now. It’s Nielsen Training and Consulting. I work with nonprofits nationally, principally, in three different areas as Steven mentioned.
As an attorney I worked with nonprofits on legal issues. I also work with nonprofits on board governance issues, board retreats, board planning, governance roles and responsibilities. I do a significant amount of strategic planning as well and then finally, performance management, CEO evaluation, executive evaluation, board evaluation, staff evaluation. I love working with organizations around the country. I encourage you to reach out to me. I would love to have conversations, learn more about your missions. I could be reached by email at [email protected].
My website is www.nielsenconsults.com. I’m active on Twitter @gregory_nielsen, also on LinkedIn. And as Steven mentioned I have launched a podcast called Nonprofit Vision with Gregory Nielsen. It’s available on my website at www.nielsenconsults.com. It is also available on iTunes, Google, Stitcher, your favorite podcast platform. I was thrilled to have Steven as one of my recent guests and we have a great time and a great conversation. If you enjoy discussing issues relevant to nonprofit leadership, I encourage you to check out the podcast and would love to hear more from you and engage with you but Steven, I’m going to turn it over to you now for us to take some questions before we wrap up.
Steven: All right. Awesome, thanks, Greg. Yeah, we owe you our thanks first before we dive in. This was an awesome overview. I am so thankful you did this for us because we’ve gotten a lot of requests for this topic. It’s a topic we never covered and now we have like the definitive explanation. So this is really awesome, great. Thank you, thank you, thank you.
Now I can send something to folks when they ask us, so I owe you one big time and hopefully everyone else who’s listening in enjoyed it as well. Really good, really thorough, I learned a lot too because this is a topic I don’t know much about either, not that I should know about it. I don’t know a lot about most topics but now I know a little bit about this one, so thank you. This was awesome. And we do have some questions here. We got a lot of questions actually so I’m going to kind of roll through as many as we can.
Here is one from Victoria that I thought was kind of interesting, so we’ll start here. Pros and cons of working with a sponsor that’s in a different location than you, so out of state, maybe a few states away. Are there issues with that? Should you look for a fiscal sponsor that’s close to you geographically? Does that matter? What do you think about that, Greg?
Greg: Victoria, that’s a great question. Being Valentine’s Day I think the answer to that is it’s similar to entering into a long distance relationship, right?
Steven: Okay.
Greg: There were pros and cons of a long distance relationship, and, you know, one of the challenges of working with a sponsor that’s in a different geographic area is how do you maintain the strength of that relationship? So at the outset it can be difficult to engage in that due diligence and really evaluate how well sponsor is going to be a fit for my project if we’re not sitting directly across the table from one another. Obviously, it’s also technology challenges of, you know, that ongoing reporting relationship, how in-depth is that going to be and how difficult will that be to manage in a different geographic area?
So I typically recommend nonprofits to start local, see if there’s someone within your geographic regions that could be a good fit for you. If not, there’s no prohibition whatsoever and it certainly could work out well to have a sponsor in another geographic area. But just like any relationship, I tend to lean towards closer being better.
Steven: Cool. I love it. Here’s another one, how long you should a relationship like this to last? Do they have typically have end dates? If they do or don’t, you know, what’s kind of a good length of time? Should these things be indefinite or should they last weeks or months? Is there a hard and fast rule? What do you think about kind of the lengths of these types of agreement and arrangements?
Greg: There’s not a hard and fast rule, however, I do recommend there’d be a specific term in the agreement. So I get a little bit nervous just because some of the common disputes that can come up in a fiscal sponsorship contract are around term and terminations and exits. And so I like to have that clearly spelled out within the contract. I’ve seen contracts for a year. I’ve seen contracts for three years, five years, so I don’t think there’s a hard and fast rule as far as what that term should be. I think it’s really the product of how confident or how long a term are we comfortable with, both parties. But I do like specificity when it comes to how do we end that term? How do we go our separate ways if we need to?
Steven: Thanks again. It seems like the most important thing you laid out is like just write everything down, right, make sure everything is spelled out because it’ll save you heartburn.
Greg: It’s just like any other relationship, the more we can go in with our eyes wide open and clearly understand who does what. How does the relationship get consummated? How does the relationship end? The more likely we are to end the relationship on a positive note and that’s what both parties want.
Steven: Make sense. Here’s one from my pal, Becca. Becca is wondering if it’s common for a representative of this fiscal sponsor to sit on the steering committee of the project. Is that typical? Is that something that you would expect the sponsor to request? What about that? And are there other things like the board? Are there, you know, implications for boards’ seats? Anything like that, curious
Greg: Yeah, great question. I don’t think that it’s atypical. So I think that if a sponsor from an oversight standpoint felt comfortable having a member on a steering committee of the project, I think that that’s fine. So one thing the sponsor would want to be aware of though is to maintain the boundaries of the relationships. So if it’s a contractor relationship with the project, having someone on the steering committee needs to be aware to not cross that line into employee-employer relationship and overly control the activities of the project. Projects still need to be able to maintain some degree of autonomy and independence in the way they carry out their ideas.
Steven: Okay. So that dovetails into the question here also from Greg, so Greg is asking Greg a question, not confusing them, but Greg is wondering if this fiscal sponsor could pay for the project staff’s salaries or would the staff have to be brought in as a staff of the sponsor in order for that to happen. So either they’re brought in by the fiscal sponsor and paid for them or they’re already there and paid by the fiscal sponsor or is none of that good?
Greg: Honestly, it depends on the contract and the way they structure it. I have seen arrangements where the sponsor does pay the salary of the idea of the project, however, I would say that’s probably less the trend than others. I think typically trying to maintain as much autonomy and as much distinctness between project and sponsor as possible. So the project developing its own budget, finding its own revenue sources, and then the sponsor being able to provide those funds, basically release those funds in accordance with the budget.
Steven: Okay, got it. Here’s one from Siri and Siri if I’m pronouncing your name I’m so sorry but that was my first crack at it. But they’re wondering . . . so they work at a public library, municipal agency, and they write grants and they raise funds through a different 501(c)(3), so friends of the library type organization because they don’t have a foundation. So they’re wondering if you recommend a formal written document for the fiscal sponsorship. Is that something that you would want to do for that kind of friends of the library group?
Greg: So I’m just making sure I understand Siri’s question. Their library writes grants and raises funds through an existing 501(c)(3)?
Steven: Yes. Looks like it, yeah.
Greg: Since they don’t have a library foundation. I, you know, I would have to know more about the relationship. Their library being a municipal agency is sort of the fly in the ointment there. I don’t want to specifically answer this one because I don’t want to give Siri bad information on this. Honestly, this is one that I would . . . Siri, I would welcome direct contact. If you want to email me, I would want to just do a little bit of research and gather a little bit more information before I answer this one.
Steven: Okay, cool. Here’s one from Jaime. Jaime is getting started with their project, it’s in the idea stage. Is that too early to maybe approach potential fiscal sponsorships or should, you know, is it okay to approach them even though they’re just now in the idea stage? Like what to you is the best timing for maybe courting a sponsorship arrangement with that one?
Greg: I think it’s walking that fine line between am I ready to have an impact where I think I will be generating some donations, right? We don’t want to approach a sponsor too early because as we’ve said one of the evaluation tools that they may have is what are your current activities and accomplishments? If we don’t have any activities or accomplishments yet, that could be troubling for a fiscal sponsor and cause them to take a wait-and-see approach.
But if I’m a project that is somewhat active. I have formed my business plan. I formed my work plans and I think I’m ready to attract some donations or I have individuals who are ready to donate to my organizations, then it’s not too early because I want to be able to provide that tax deduction, that vehicle for others to donate as well. So it’s somewhere between the initial light bulb has gone off and the, “I already have all of it figured out,” is the stage to approach the sponsor.
Steven: That makes sense. Okay, we’ve got probably time for one more. Looks like we got one from Jane. Kind of going back to the nuts and bolts of the money, Jane is wondering if the fees are based on the project budget or they’re based on the donations to the project or is it a combination. So how are those kind of fees calculated? I know you talked brief about fees but how exactly do they kind of decide how much those might be?
Greg: I’ve seen it both ways. I’ve seen it based on the budget and I’ve seen it based on the funds received, so the funds under management basically. I would say more common is the funds under management. So for example, if the sponsor is, you know, received in any given year between $50,000 and $100,000, the administrative fee will be taxed and it could be a tier, right? If we receive between 0 and 100, it’s X. If we receive between 100 and 200, it’s Y. But I’ve seen it more frequently as funds received rather than projected budgets and honestly from a project standpoint if I was working with a project to negotiate their agreement, I would be a much more comfortable and confident based on actual funds rather than budget.
Steven: Yeah, that makes sense because, you know, things to know is expense as the project gets underway so that this seems like this will kind of protect you, protect everyone really. Okay, that makes a lot of sense. Cool.
Greg: And as sponsor it’s a fair arrangement that way because from a sponsor’s perspective they’re going to most likely be having to do more administrative work if there are more funds received. If they’re having to disburse checks and writes checks to the project more frequently, you know, that increases their administrative load also.
Steven: Makes sense. Boy, this is awesome. This is like, this is great. This is really, really informative I know you and I could probably talk about this stuff all the day but we’re coming up at the end of the 3:00 hour and I want to be respectful of everyone’s time. Any last thoughts, Greg, what’s, you know, maybe one thing people should do or think about as we kind of close out today?
Greg: I think the one thing that I would encourage people to think about is the aspect of building a relationship because that’s what . . . that is a fiscal sponsorship boils down to is how well do we know one another, how comfortable do we feel linking arms in a relationship like this, how transparent and open can we be with another.
Steven: I love it. [Got it 00:57:27]. This was awesome, Greg. Thank you so, so much for doing this for us and now we’ve got this topic covered and rather definitively if you don’t mind me saying, so thank you, thank you.
Greg: It’s my pleasure and I look forward to hopefully connecting with many of the participants on the webcast.
Steven: Yes. Please, please do, email your questions if we didn’t get to them or maybe you didn’t ask the in the chat. That’s okay. Honestly, Greg’s a wealth of knowledge here. Check him out especially if you’re down near the Louisville area and definitely listen to his podcast because I have a feeling he’ll have much better guests on than me in the near future. But I was a good appetizer for perhaps.
Greg: Outstanding.
Steven: So thank you all. Thanks for all of you for hanging out for an hour or so. I’m going to get you the recording and the slides here in the next couple of hours. I’ll get that to you I promise. And hopefully, we’ll see you again next week. We are going to have the queen of monthly giving. I think the foremost expert in monthly giving, Erica Waasdorp, good buddy of mine. I run into her at conferences from time and now and again during the year, really awesome. She literally wrote the book on monthly giving. So if you care at all about monthly giving, you should care about it. You want to attend this presentation, same time, same place next week. She’s going to talk about how to keep those monthly donors because it’s not guaranteed they stick around once you get them in the door even though you may have that credit card number.
So definitely check that one out. It’s going to be fun presentation and we’ve got lots of sessions scheduled out throughout the year, almost through the summer now already, lots of cool topics, great features, just like Greg. So we’d love to see you again on another of our Thursday webinars.
We moved it to 2:00 p.m. I don’t know if . . . some of you may have noticed that so we’re going to give those West Coast folks a little bit more time in the morning to join us so get used to the 2:00 hour but we’re going to keep it on Thursdays for sure. So I’d love to see you again. And like I said I will give you the recording and the slide late on this afternoon. So we’ll call it a day there, just look for an email from me with all those goodies. Please reach out to Greg and hopefully we’ll see you again next week, so have a good rest of your Thursday and have a safe weekend and we’ll talk to you again soon.
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