Making the Most of Fiscal Sponsorship: Sample Lesson and Materials

tl:dr: Whether to leave fiscal sponsorship and go out on their own is often the biggest decision that a sponsored project team will make. But it’s important to realize that most sponsored projects stay under fiscal sponsorship for their entire existence. So, while many projects start the conversation with “When should we leave (our fiscal sponsor)?” most should be first asking, “Should we stay under fiscal sponsorship?”

There are many valid reasons to exit fiscal sponsorship, but just as many to stay, including: cost containment/cost certainty, focus on program and fundraising, taking advantage of economies of scale and staying out of the spotlight.

We talk to fiscally sponsored project leaders all the time that aren’t sure if they should leave their sponsors. This is often the landmark decision that many projects think they need to make early on to set their long term course. And while most start with the reasons why the project should leave, we like to take a counterintuitive approach – what are the reasons why a project should stay under fiscal sponsorship?

There are often multiple, compelling reasons why an FSP should stay under fiscal sponsorship, but they are usually glossed over or given short shrift in these discussions.

With that in mind, we are using this lesson to give attention to some common rationales for FSPs remaining under fiscal sponsorship.

Before we get to that, we want to share something that may seem logical but that many project leaders don’t consider: the vast majority of fiscally sponsored projects don’t ever leave their fiscal sponsors. 

Let that sink in for a moment.

While there isn’t yet sector-wide data for this, anecdotally, over the last decade plus of working in this sector, we can confidently stand behind the bolded statement above.

With that in mind, let’s put some outlines to this lesson:

• There are definitely meaningful, valid reasons to leave a fiscal sponsor (and/or exit sponsorship altogether) and we’ll get to those in Lessons 8 and 9.
• There are a small number of fiscal sponsors that actually do require their projects to leave after a certain period of time or after certain thresholds (i.e. annual revenue) are met. But that is a fairly rare requirement within the sector.
• Our rationales below assume that the project has a relatively standard Model A arrangement with the sponsor – that is, the project:
  • Contributes a shared cost/admin rate in the 10-20% range, plus reasonable additional costs, as applicable
  • Has reasonable autonomy in its programmatic work/activities
  • Isn’t unreasonably restricted when it comes to fundraising
• The focus of this lesson is the case for staying sponsored – but that doesn’t necessarily mean staying with your current sponsor. Many project leaders aren’t aware that projects can move from one sponsor to another, and can even change the model of sponsorship they are under – which often changes the nature of the relationship with the sponsor. (These options will be discussed further in Lesson 10.)

Now, let’s talk about some of the most common arguments for staying under sponsorship:

Overall cost containment
This is a big one. Many project leaders we’ve spoken with believe going out on their own will save them money. But, unless the project’s annual budget is in the seven figures (or it’s paying an unreasonable amount in shared costs), our experience – and cost comparison work with projects – shows that spinning out into an independent 501(c)(3) will, in most cases, increase the organization’s expenses, not decrease them.

We’ve worked with multiple sponsored projects with annual budgets that were either at or above $1 million, and whose leadership strongly believed that exiting fiscal sponsorship would result in cost savings. After we ran the numbers, it was clear that their costs would almost certainly go up after they left their fiscal sponsor – and that was accounting for different options for replacing their sponsor’s support.

How much a project’s costs might change depends on a number of factors – current admin costs, size and make-up of the staff, other needs – but if your annual expenses are in the low seven figures or lower, it’s very likely that your expenses would increase by leaving your fiscal sponsor. In fact, in the vast majority of cases, an organization’s overhead costs will never be lower than when they are under fiscal sponsorship.

That being said, we know a lot of people (project leaders, advisory board members and funders) chafe at the idea of a percentage of dollars raised to support the project going to the sponsor. That’s understandable and human nature – but what those same folks often don’t consider is that, on its own, the project would very likely be paying more for similar (or lesser) services/support – while having to manage a greater number of partners (instead of just a single entity – the fiscal sponsor).

Cost certainty
An offshoot of #1 above is this: once a project leaves its sponsor, its costs (especially those related to medical insurance and other benefits) can become more variable. Sometimes that means costs can go down, but more often than not in this day and age, it means costs will rise at a quicker rate.

Focus on program and fundraising
The core reason why many projects start under fiscal sponsorship, instead of getting their of c3 from the get-go, is to allow someone else to manage your backoffice and admin activities, while you and your team focus on developing the organization’s programmatic work and building the financial support for that work.

For many projects, even after 3-5 years (or more), that rationale still holds. Even after successfully launching program(s) and fundraising for the work, you may still be better off keeping the administration work in the hands of a trusted partner that has more experience and better systems to handle the scores of small and large items that need to be managed.

We always say that one of the reasons that fiscal sponsorship is such a valuable tool is that “most people don’t start nonprofits to run payroll twice a month, compare benefits providers or regularly file forms to the IRS.”

People start nonprofits to make a change in their world – and fiscal sponsorship allows them to focus on that change, rather than having to become an expert in all of the other things it takes to run a small business (which is essentially what a nonprofit is – but with more red tape and government requirements).

So, unless things have dramatically changed on that front (i.e. you’ve developed a strong desire to manage your organization’s employee benefits and audit, or you’ve brought on an operations team to do all of that work), fiscal sponsorship is still likely the best option for your project.

Take advantage of scale
This is another tried-and-true advantage of fiscal sponsorship that your organization has likely benefited from already. You probably already know that, under fiscal sponsorship, you can offer employees better, more comprehensive medical/dental/vision insurance (likely at a much lower cost). But that advantage likely applies in other areas as well:

• Group Life insurance
• Retirement accounts
• Payroll processing
• HR services
• Accounting services
• Liability and workers compensation insurance
• Independent financial audit
• State charitable registrations
• State employer registrations
• General legal support
• Employment law support
• Banking
• Technology platforms

Not all of those may apply in your specific case, but it’s likely that at least some of them do. And those are the areas where the costs are likely less than you’d find on your own – either because your fiscal sponsor gets better rates, or because they can spread the costs over multiple projects.

In addition, if your project does any lobbying work, and you’re at a fiscal sponsor that has even a handful of projects, you can likely focus a larger amount of your work on those areas, than if you were on your own. That’s because each organization’s allowance is based on its total expenditures so, instead of just basing it off of your project’s budget, you get to base the allowance off of the entire fiscal sponsor’s expenses. Even if there are other projects doing some lobbying, there’s likely more than enough allowance to go around. (Here’s a resource from the wonderful folks at Bolder Advocacy on how fiscal sponsors should view and manage advocacy. If you’re not familiar with Bolder Advocacy and your project does any lobbying/advocacy work, you should spend some time on their site – they have a large library of free resources all focused on this topic.)

Stay out of the limelight
Fiscal sponsors have the same reporting requirements as other 501(c)(3) organizations, but customarily, they meet those requirements by reporting on their operations as a whole, rather than providing details on each sponsored project.

While we never encourage sponsors – or their projects – to do anything except follow all compliance requirements, this approach means that it can be more beneficial for certain projects to remain under fiscal sponsorship and not have every detail of their work made publicly available.

501(c)(3) reporting requirements may evolve making this less of a benefit at some point (and in fact, certain fiscal sponsors have been under a political spotlight over the last few years which has made the opposite true for projects housed in those organizations), but for now, this is something for certain projects to consider.

You know better than we do what your project’s situation, needs, constraints and goals are. And we know, from working with dozens of organizations at all points along the spinout continuum, that there is a lot of nuance in how these conversations are held and how these topics are discussed. But we often find that many project leaders want to advocate to remain under fiscal sponsorship, but often don’t have the information to make a strong case to others who may be advocating for separation. It’s our hope that through this lesson, we’ve been able to show some of the important benefits that long-term fiscal sponsorship can provide and how exiting isn’t always the best path.

If you have any questions, comments or thoughts you’d like to share, please don’t hesitate to hit reply and get in touch – we’d love to hear from you.

Otherwise, we’ll see you at the next lesson.