To stay or go?
Indicators for projects considering independence
This article is the second in a series about fiscal sponsorship, organizational resilience, and autonomy. You can read the first article in our series here.
After gaining the lived experience of being fiscally sponsored for some time, leaders begin to understand how the services provided by their fiscal sponsor affect their project’s impact, sustainability, and resilience. At this point, many begin to ponder: Is my fiscal sponsor supporting or inhibiting my project’s sustainability and growth? Should I seek a new fiscal sponsor? Is fiscal sponsorship itself the correct vehicle to advance our mission? Should I establish an independent tax-exempt nonprofit?
At this point, leaders must make a decision — should I stay or should I go?
Through my experience delivering finance and operation services for nonprofits and fiscally sponsored projects over the last 13 years, I have identified practical key performance indicators that signify that a startup or growing project organizing for justice may be ready to establish an independent tax-exempt nonprofit.
Indicator 1: Project is financially resilient.
Projects organizing for justice should remain fiscally sponsored until their total net assets are equal to or greater than twelve months of budgeted expenses on a rolling basis.
Projects must also have a likely-to-succeed and based-in-reality revenue forecast to raise the budget required for the second and third year of independent operating, taking into account both current expenses and independent operating costs like employment operations, legal, compliance, and governance counsel, insurance, and other costs.
My recommendation is informed by my own lived experience working with projects establishing nonprofit tax-exempt entities and the landscape analysis of nonprofit financial health conducted by Jacob Harold of Candid.
Noticeably absent from my recommendation is that projects should maintain an operating reserve. In my opinion, operating reserves are neither strategic nor informed by the reality of the ebb and flow of nonprofit operations. Maintaining funds with no clear purpose in a reserve fund inhibits the ability of projects to react and respond quickly to opportunities, limiting impact for no clear purpose. When a project has twelve months of budgeted expenses on a rolling basis, they have the ability to make informed decisions in real-time to meet the reality of any situation they may face without the constraint of a separate, non-strategic reserve fund.
Achieving financial resilience requires budget management, financial forecasting, and revenue generation, which are some of the most challenging components of nonprofit management. However, once a project has firm control and understanding of these components, the financial resilience projects achieve in fiscal sponsorship empower them to focus on all of the other mechanics of transitioning from fiscal sponsorship to an independent tax-exempt nonprofit.
Leaving fiscal sponsorship requires significant time and resourcing (both human and financial). Any concerns about financial resilience during this transition period will likely lead to poor decision-making and less than stellar performance, which are key components to achieving greater impact. Projects that do not meet both of these criteria for financial resilience should remain in fiscal sponsorship.
Projects that do not have the resourcing they need to achieve financial resilience in fiscal sponsorship should consider seeking a new fiscal sponsor to provide these services. Financial resilience is the first step in a long journey to achieve independent tax-exempt status — without these necessary resources, it is nearly impossible to successfully establish independent operations.
Indicator 2: Project has shifted from tactical programming to achieving a long-term strategic mission.
Many projects organizing for justice enter fiscal sponsorship to accomplish a specific, often time-bound, program activity. Examples include convenings, research, or organizing pilot programs. These are generally one-and-done projects within limited time frames and conducted to produce very specific desired outcomes.
Based on the outcomes of the activity conducted with that funding, projects may receive additional support to continue the work or advance a more expansive strategy. This type of activity indicates projects are progressing through the life cycle of a nonprofit, from startup to growth and the prospect of maturity.
For example: A project focused on educating their community on stop and frisk may expand its program to include lobbying efforts for increased accountability for law enforcement due to demand from both the community and local philanthropy. A few other local foundations make commitments that allow the project to expand and diversify their program offerings to meet longer-term outcomes and empower them to project revenue over the next few years.
The project may now consider leaving fiscal sponsorship as its program is no longer one-and-done. Instead, the project has a clear strategy, with several programs that attract diverse financial and public support, that will advance a long-term vision rather than a singular tactic.
Indicator 3: Project is taking risks to advance justice.
As discussed in the first article of this series, the ability of projects organizing for justice to challenge institutions of power and hold them accountable is essential to achieving justice. Often, this opportunity cannot be planned, requiring projects to react quickly, know in real-time what resources can be deployed (and how to do so in compliance), and take significant risks to organize for justice.
Programmatically, this often means engaging in direct lobbying and grassroots lobbying for 501c3 projects and partisan interventions for 501c4 projects. These activities are commonly referred to as non-primary purpose, which are highly regulated by federal, state, and local government agencies and require significant tracking, reporting, and compliance for both revenue (money-in) and expenditures (money-out).
Operationally, this often means knowing in real-time the availability of total net assets, how those total net assets may be spent (with donor restriction (knowing whether the net assets can be spent on direct lobbying, grassroots lobbying, partisan interventions) and without donor restriction), and accurate forecasting of future revenue and expenses for both primary and non-primary purposes.
An additional layer of complexity is that non-primary purpose activity is calculated based on the entire activity of the fiscal sponsor for the full fiscal year. This means that a fiscally sponsored project must not only account for its own revenue and expenses but also understand the activities of all of the other fiscally sponsored projects of their fiscal sponsor and coordinate and ask for and receive permission from their fiscal sponsor prior to conducting these activities.
Direct lobbying, grassroots lobbying, and partisan interventions are some of the most strategic levers a project can use to challenge and hold government institutions accountable. They also require significant systems, processes, compliance, and day-to-day decision-making by leaders organizing for justice.
When projects begin to engage in these types of activity, I recommend establishing an independent tax-exempt nonprofit in order for projects organizing for justice to fully control, monitor, and implement these complex, high-risk, and high-reward activities.
Indicator 4: Project understands the services they need from fiscal sponsorship and whether fiscal sponsorship is the right vehicle to achieve its mission.
There are many insightful case studies and articles that have been written about the level of services provided by fiscal sponsorship and when it is time to find a new fiscal sponsor due to misalignment on mission, issues around communications, administrative challenges, and limited services supporting growth.
I recommend projects organizing for justice engage in an annual contract renewal process with their fiscal sponsor to review the following:
- Services provided by the fiscal sponsor,
- Amend the contract to include new services needed to support the growth of the project,
- Reduce services no longer needed, and to
- Negotiate a new fee for fiscal sponsorship services that is beneficial for both the sponsor and project.
For example: A project has been in comprehensive fiscal sponsorship, which usually consists of administrative and support services, including financial management, employment operations, legal and regulatory compliance, grant management, etc. If the project is planning to establish its own independent tax-exempt nonprofit, additional services by its fiscal sponsor will be required during the transition.
Including additional services during an annual contract renewal process and any increase in fees needed to cover additional services helps to ensure that the level of services needed by the project is understood and agreed to by the fiscal sponsor and that the fiscal sponsor is fairly compensated for any additional services.
In my view, a current fiscal sponsor that is unable or unwilling to provide the new services needed for growth is not necessarily an indicator for establishing an independent tax-exempt nonprofit. In this case, I recommend projects conduct a request-for-proposal process with two to three fiscal sponsors that would be willing to provide the services. If, after conducting the request for proposal process, a project determines that none of the proposals would meet their needs, it’s then that I recommend the establishment of an independent tax-exempt nonprofit.
Indicator 5: Project is confident and feels empowered to make a decision about staying in fiscal sponsorship, finding a new fiscal sponsor, or establishing an independent tax-exempt nonprofit.
The decision to stay with a current fiscal sponsor, seek new fiscal sponsorship, or establish an independent tax-exempt nonprofit is a recurring question that leaders of projects organizing for justice face. There are many fiscally sponsored projects organizing for justice that continue to be well served by their fiscal sponsor over years and even decades. For others who have been under-served by their fiscal sponsor, they have had to transfer their assets to a new fiscal sponsor (and sometimes undergo this process several times).
In my experience, projects are well prepared to leave fiscal sponsorship and establish their own independent tax-exempt nonprofit once they have achieved financial resilience, expanded from tactical projects to strategic programming, have an increased desire to take on more risk for greater reward, and have fully explored alternative options to establishing their own independent tax-exempt nonprofit.
Are you a fiscally sponsored project organizing for justice thinking about your relationship with your fiscal sponsor? I want to hear from you. Please share your stories to better inform our program and the content we distribute! Please connect with us here.
Leaders curious about taking the next step to organizational independence, let’s talk. Whether you have questions about taking the first step in your journey for autonomy or control, or need support finding the right services for your project’s needs, I am ready to be of service, free of charge; just complete the form and sign up for a time.
Want to learn more about Cooperative Impact Lab? Join our mailing list and be on the lookout for our upcoming comprehensive timeline and checklist of a process for fiscally sponsored projects to establish a single or multi-entity independent tax-exempt nonprofit.
Josh Wolf is an independent contractor and acts as the Operations Consultant for the Cooperative Impact Lab. He is also leading the work to design a Fiscal Sponsorship Cooperative to address many of the challenges outlined above. Please contact us here if you’re interested in being a part of this project!
