As an employee, volunteer leader, funder, or advisor to a fiscally-sponsored nonprofit project that’s had some success, it’s almost inevitable that, at some point, the idea of separating from your sponsor will come up. Different people call it different things from “spinning” or “spinning out” to “separation,” “graduation,” or even “leaving the nest,” but they all mean the same thing: becoming an independent 501(c)3 and leaving the trappings of fiscal sponsorship behind.
To some projects, separating sounds very enticing, and to others, it’s probably a terrifying thought. Here are some of the key reasons why projects separate and insights into a rarely thought of option that may make sense for many projects at this crossroads.
Quick point of clarification: There are approximately seven different models of fiscal sponsorship and even within each of those models, each sponsor organization has its own unique approach. To streamline things a bit, I’ll focus on the Model A type of fiscal sponsorship (also sometimes referred to as “comprehensive”) through this post, although my points below should resonate with those under the other models of sponsorship as well.
Why Do Projects Separate?
Let’s start with why projects generally want to separate from their sponsors:
- “Social Pressure” – One of the top reasons that I hear from projects is that “it’s just time for us to be out on our own.” This is usually code for someone – the project leader, a funder, an advisory board member – believing that once the project gets to a certain size, budget or age, fiscal sponsorship is no longer an acceptable setup. This line of thinking is problematic on a number of levels and can lead to bad decision-making.
- Fees – Cost is probably the reason that grates on project leaders and funders the most, if only because it’s right in their face every month when they review their financial statements. If the project is successful, then the fees (along with the funds raised) are going up, and that can be frustrating.
- Donors/Fundraising – Certain donors (especially individuals and some foundations) aren’t always quick to grasp the concept of fiscal sponsorship, and some may initially be turned off that ~10% of their donation seems like it is going to another organization. And so, it’s incumbent on the project’s fundraisers to be able to quickly and simply explain the benefit of being under fiscal sponsorship. This takes time and energy that they often don’t have.
- Customer Service Issues – This can manifest in a number of different ways, but it’s always a symptom of the same thing — a disconnect between what the project team expects and what the fiscal sponsor provides. And they are usually focused on areas like speed of approvals, reviews or payments (or lack thereof), or recurring inconsistencies in things like financial reporting. And depending on how frequently they occur, this can be enough for a project to seek greener pastures.
- Need for Specialized Services – In some cases, as the project grows and evolves, it may require some specialized services that the fiscal sponsor is just not equipped or willing to provide. This could be a technology or technical solution, a specialized insurance policy, extremely technical nuances in the project’s accounting, or something else altogether.
- Relationship Sours – This can be a by-product of some of the reasons listed above, but occasionally, over time, the relationship between the project team and the fiscal sponsor can go bad. This is unfortunate, as both parties usually want the same thing (for the project to be successful) but sometimes personalities, disagreements, or other issues can get in the way.
Is There a Third Way?
For project teams that feel like they need to leave their sponsor, they often get stuck thinking they have only two options: stay with their sponsor or get their 501(c)3. For some, this can seem like a no-win situation: they don’t think they are ready to be out on their own, but they really can’t fathom staying with their current sponsor.
Fortunately, there is often a “third way” – transferring to a new sponsor.
Sponsor transfers are more common than you might think and often happen because the project has outgrown its sponsor’s support or because it isn’t quite ready to handle the expense and people power of being out on its own.
These transfers don’t come without costs of their own, but they are usually much smaller and shorter term than the startup and ongoing investment it takes to be a successful 501(c)3.
Thankfully, there are many fiscal sponsors for whom fiscal sponsorship is a core part of their mission and focus, and these are the organizations that are able to better support larger or more specialized projects than nonprofits who offer fiscal sponsorship as a secondary part of their work.
How Can Your Project Make the Right Decision?
I hope you’ll join us on April 25 at 2:00 pm ET for the webinar, Transitioning From Fiscal-Sponsorship: Is It Right for You?, where we’ll discuss whether your sponsored project can approach making the critical decision of separating to become an independent 501(c)3.
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