Nonprofits in trouble: the fiscal sponsorship option

Nonprofits in trouble: the fiscal sponsorship option is reprinted from NEO Law Group.

The twin crises of pandemic and recession are straining the region’s philanthropies and could force as many as a third of nonprofits to close or merge before the economy recovers, according to top executives in the sector.
—Washington Post, August 3, 2020

In these historically challenging times, there are predictions that we could see more than 500,000 of our 1.6 million registered nonprofits disappear. A relatively modest number of these nonprofits will merge into existing nonprofits, but the vast majority will simply shut down. And with those closures will be the disappearance of a multitude of programs benefiting tens of millions of persons. Without a doubt, the persons most impacted will be BIPOC (Black, Indigenous, and other people of color), reinforcing existing inequities within our sector and our country. See Lucy Bernholz’s important opinion column in the Chronicle of Philanthropy: Confronting Philanthropy’s Uncomfortable Truths.

One option for saving programs even when the organizations that have been operating the programs can’t be saved is fiscal sponsorship.

Fiscal sponsorship has become a familiar term among many people who work in the nonprofit sector, but it’s still poorly understood and too often improperly structured and operated. This partly stems from the many ways fiscal sponsorship can be structured and the lack of any definition in the law. There are a few resources that address this problem, most notably the seminal book on the subject, Fiscal Sponsorship: Six Ways to Do It Right, by Greg Colvin and Stephanie Petit. But if more nonprofits and foundations become well informed about fiscal sponsorship, particularly comprehensive or Model A fiscal sponsorship, they will see its potential in being able to save valuable charitable programs of nonprofits on their way to shutting their doors.

A distressed nonprofit may seek to transfer one or more of its programs to a fiscal sponsor pursuant to a comprehensive fiscal sponsorship agreement. In such arrangement, the distressed nonprofit would move some employees and volunteers to the fiscal sponsor, which would provide the necessary infrastructure and back office support to keep the programs running.

In a comprehensive fiscal sponsorship arrangement, an experienced fiscal sponsor typically delegates management to the program leadership and very rarely intervenes in the programmatic activities so long as they are compliant with law, the fiscal sponsorship agreement, and the fiscal sponsor’s policies. Also in contrast to a simple transfer of the program without a fiscal sponsorship agreement, the distressed nonprofit may provide an individual or a committee with the ability to terminate the agreement and have the program transferred to another fiscal sponsor or charity.

Other characteristics of comprehensive fiscal sponsorship:

• The project has no separate legal existence
• The project (the transferred program) assets, liabilities, and obligations all belong to the fiscal sponsor and, by law, the project is under the ultimate direction and oversight of the fiscal sponsor’s board
• All of the project’s employees and volunteers are the fiscal sponsor’s employees and volunteers, and generally covered by the fiscal sponsor’s insurance
• The project director, possibly under the intermediate oversight of the project committee, is typically delegated with broad management power, and the fiscal sponsor’s administrative staff may limit any intervention to solvency and compliance matters
• All of the fundraising is done by authorized agents of the fiscal sponsor (i.e., anyone associated with the project who is fundraising should understand and follow the fiscal sponsor’s fundraising policies)

Funders can support the continued existence of effective programs that make an important difference in communities even where the nonprofits that house these programs may not be able to survive. These programs can be transferred to qualified fiscal sponsors that can provide the capacity and administrative support that allow the program’s leaders to keep serving their clients and beneficiaries.

Resources

Fiscal Sponsorship: A Balanced Overview (Takagi, Nonprofit Quarterly)

Fiscal Sponsorship: What You Should Know and Why You Should Know It (Erin Bradrick, American Bar Association)