Frequently Asked Questions about Fiscal Sponsorship as a Non-profit Merger Alternative

In his February 2009 ED Forum, TSNE Executive Director Jonathan Spack outlined an alternative to non-profit mergers in this economic crisis - fiscal sponsorship. Here he answers frequent asked questions about the process.

Q: How does fiscal sponsorship work, exactly?

In a fiscal sponsorship arrangement, the sponsor serves as the tax-exempt corporate home for mission-related projects and all funding flows through the sponsor to the project. The sponsor provides financial, human resources and other administrative support, which frees up project staff to focus on delivering programs and services and on fundraising. An overhead or administrative fee is charged to the project.

Q: If my nonprofit transitions to fiscal sponsorship, what happens to its fund balance and other assets?

Because fiscal sponsorship doesn’t require an existing nonprofit to go out of business, it can retain assets which aren’t needed to support its operations, even if operations are now under the fiscal sponsor. At a later date, if it returns to independent status, those assets will be available. If, on the other hand, the ultimate decision is to dissolve the corporation, state law may require formal approval of any transfer of assets. The general rule is that the assets must be used for purposes similar to the original mission. The fiscal sponsorship option allows this decision to be postponed.

Q: In fiscal sponsorship, who is legally responsible for the activities of the project?

One important responsibility of fiscal sponsors is to assure compliance with all applicable laws and regulations. The sponsor reviews and signs all leases, contractual agreements and other legal documents on behalf of the project and all staff become employees of the fiscal sponsor. However, hiring decisions are delegated to project directors and strategic and programmatic decision-making authority remains with the project.

Q: What role will the current board of directors play after the transition to fiscal sponsorship?

After the transition, the fiscal sponsor’s board assumes legal and fiduciary responsibility for the project. However, the nonprofit’s board may wish to remain in place to provide strategic, policy, and programmatic oversight and guidance to the project director and as an additional communication link with the fiscal sponsor. The board would also continue to be responsible for evaluating the director’s performance. Unincorporated fiscally sponsored projects operate with advisory boards rather than formal legal boards.

Q: What will the impact of fiscal sponsorship be on the nonprofit’s staff?

As employees of the fiscal sponsor, project staff will be guided by the sponsor’s personnel and fringe benefit policies. Because all fiscal sponsorship employees are on the same benefit plan, sponsors generally offer more comprehensive benefits than a smaller organization can provide.

Q: We work with several subcontractors and consultants we want to retain. Can we do that?

Yes. Fiscal sponsorship includes management of consultants and other vendors. The fiscal sponsor does not dictate which subcontractors projects should use but may be a valuable resource in this regard.

Q: Who’s responsible for reporting to funders?

Generally, the project prepares programmatic reports and the sponsor prepares financial reports. All reports are submitted through the sponsor, which is the official recipient of funding. The sponsor also acknowledges all contributions on behalf of the sponsored project.

Q: Will we have real-time access to budget and financial information?

All fiscal sponsors provide projects with timely financial reports. Some sponsors may also have the capacity to provide online, real-time access to financial information.

Q: What if we want to resume our independent existence at some point?

Fiscal sponsors generally ask for an initial time commitment in order to recoup startup costs, but projects are free to resume independent status at any time, assuming they are still incorporated and have federal tax-exempt status. Responsible fiscal sponsors will gladly assist with this transition.

Q: Will we still need a separate audit?

No. Fiscally sponsored projects are included in the sponsor’s overall audit report. Income statements for each project are included in the audit.

Next Steps

If your nonprofit is facing budget reductions, staffing cutbacks and the loss of basic administrative capacity, consider the fiscal sponsorship option. It may prove to be a painless way to preserve your core mission and programs until the economy revives. For more information about TSNE’s Fiscal Sponsorship program, contact Kay Snowden at 617.523.6565.