The Need for Autonomy: Exploring the Limitations of Fiscal Sponsorship for Projects Organizing for Justice

This is the first of a series by Josh Wolf exploring what is needed to support non-profit leaders organizing for justice to grow their organizations and seek independence and resilience.

A parent whose child was recently diagnosed with a rare disease launches a project to find therapies and a cure. Friends of students murdered by a school shooter launch a project to exact justice for victims of gun violence. Community members mobilize to protest book bans at their local libraries. BIPOC youth organize a collective to hold institutions of power responsible for societal injustices against their community.

These leaders come to the work of organizing for justice through their lived experiences. While some may hold business or public administration degrees, most learn to build and run their nonprofit through trial and error (a.k.a. Lived experience!), a topic Fredrik O. Andersson examined thoroughly in the Journal of Public and Nonprofit Affairs article, How Valuable is Experience? Examining the Impact of Founder Experience on Nonprofit Start-Up Success. For others, they rely on fiscal sponsorship to operationalize their work.

My name is Josh Wolf, and I spent the last 13 years delivering finance and operation services for nonprofits as the Director of Operations for MoveOn.org, Director of Operations for the Mozilla Foundation, Chief Operating Officer for Cory Booker’s Presidential Campaign, and for the past three years providing support and services to hundreds of startup and growing nonprofits organizing for justice, including those leaving fiscal sponsorship, through Cooperative Impact Lab and my own company.

In the early 2010’s, I had overall management responsibility for a fiscal sponsorship program and have dedicated my career to supporting growing nonprofits and fiscally sponsored projects to establish and operate their own independent — and often multi-entity — tax-exempt nonprofits. Over the years, I have observed the limits of fiscal sponsorship and the challenges leaders face.

The daily work of running a nonprofit is endlessly frustrating for movement leaders, not because it is unimportant but because traditional support structures need to do more to equip them with the knowledge, expertise, and lived experience they need. Impact and resources are lost while movement leaders run to catch up on the hidden curriculum of the nonprofit management world — or sacrifice their independence for the protection fiscal sponsors provide.

At Cooperative Impact Lab, we are actively working to solve this gap. The first step is to bring conversations on the necessity of infrastructure investment for nonprofits and the limitations of fiscal sponsorship to the forefront.

Fiscal sponsors provide critical services to projects organizing for justice, and while resources have been dedicated to identifying how to improve current fiscal sponsorship (Read: TSNE Partners in social change “Reimagining Fiscal Sponsorship in Service of Equity”) for those projects best served by staying in fiscal sponsorship, there is an unidentified gap in providing the services and building the infrastructure for leaders of growing, fiscally sponsored projects organizing for justice that are ready to take the next step and become an independent tax-exempt nonprofit.

Fiscal Sponsors mitigate risks for nonprofit projects. They can also limit impact.

Hundreds of active fiscal sponsors in the United States collectively support thousands of fiscally sponsored projects, raising and spending hundreds of millions of dollars annually. In many cases, the baseline administrative and financial services provided by fiscal sponsorship are what startup projects organizing for justice need for the first few years.

When projects organizing for justice grow, they experience the limitations of fiscal sponsorship, often citing the need for autonomy and control to take on more risk in exchange for greater programmatic impact. In my experience, it’s generally at this point that projects consider becoming an independent tax-exempt nonprofit and realize that while their fiscal sponsor has served them well, they have not gained the knowledge and lived experience to establish and operate an independent tax-exempt nonprofit.

Some examples (not a definitive list) of this include :

Policies and Procedures:

Fiscal sponsors develop internal operating policies and procedures compliant with state and federal law that apply equally to all of their fiscally sponsored projects. This means fiscal sponsors govern the internal operations of all of the projects.

For example, a fiscal sponsor’s employee handbook applies not only to its employees, but to all of the projects’ employees. As those projects grow, they focus on attracting new talent and aligning their hiring policies with their values. However, they are quickly confronted with the reality that employee policies — compensation, benefits, hiring, termination, discrimination policies, diversity, equity, belonging, and accessibility, prohibitions on civil disobedience, etc — are established by their fiscal sponsor and cannot be molded to create the unique culture to attract and retain talent the work demands.

Financial Reporting and Management:

Another example is financial reporting and management. A fiscal sponsor sets forth the chart of accounts, tracking dimensions, financial controls, month and year-end close processes, and financial reporting schedule. Often, for growing projects to make informed decisions more quickly and with more confidence, they require expedited financial reporting, up-to-date recording of transactions, and the ability to produce multiple what-if financial scenarios. Fiscal sponsors aren’t generally set up to provide customized financial reporting, meet off-schedule transaction recording deadlines, and make lightning-fast decisions that carry significant contractual, reputational, and financial risk.

Programmatic Activities and Strategy:

Projects organizing for justice might explore work that challenges institutions of power and requires new or increased activities outside of their tax-exempt primary purpose. As fiscal sponsors operate in a cohort model, this work (non-primary purpose work) is often restricted.

For 501(c)3 projects, this includes limits on the amount of lobbying, grassroots lobbying, and unrelated business income, as well as a prohibition on political campaigning. For 501(c)4 projects, these limitations affect political campaign interventions, direct lobbying, grassroots lobbying, and unrelated business income.

Fiscal sponsors have to ensure all non-primary purpose activities are conducted in accordance with state and federal laws and that reporting to various state and federal agencies is completed on time and without delay. To protect the tax-exempt status, mitigate risk, and limit reporting, fiscal sponsors often limit work that directly challenges power because the compliance and tracking of financial and programmatic information is too complicated and burdensome due to having multiple fiscally sponsored projects. Within a fiscal sponsorship model, projects cannot act independently — everyone’s raise and spend must be taken into account — as those risks can jeopardize all projects.

Under fiscal sponsorship, projects organizing for justice can only grow and scale to a certain point before they hit the ceiling, seeking autonomy and control to take on more risk for higher impact.

What happens when projects are ready to achieve autonomy and become independent?

When leaders decide to achieve operational independence, what often follows are sleepless nights of worry and endless googling of nonprofit management. While fiscal sponsorship may have served them well, these leaders begin their journey without the necessary knowledge, lived experience, and infrastructure to successfully establish and run an independent tax-exempt nonprofit.

Time and time again, leaders I work with feel unprepared to make decisions about nonprofit finance and operations. For example, when submitting an application for IRS tax-exemption, the very first step in establishing independence, leaders must:

• Establish a board of directors,
• Submit governing bylaws and articles of incorporation,
• Develop a detailed three-year budget,
• Explain compensation and benefit offerings,
• Select a method of accounting,
• Describe primary purpose and non-primary purpose activity in detail, and more.

For most leaders coming from fiscal sponsorship, they have not had exposure to these areas of nonprofit management and lack the confidence to make these decisions.

Few projects leave fiscal sponsorship with any understanding of the internal policies, systems, and services needed to establish and operate an independent tax-exempt nonprofit. Fewer, if any, leave with the knowledge of how to establish an independent tax-exempt nonprofit and transfer assets and liabilities, something nonprofit leaders at most experience once over their career.

Without adequate systems and infrastructure, newly independent nonprofits are vulnerable to increased, often undue, scrutiny from funders and the general public. While fiscal sponsors provide critical safety and support, there is no protective net to catch projects making the journey to independence.

What next?

A missing piece of this conversation is the role of philanthropy in supporting an ecosystem of resilient, sustainable, and independent nonprofits organizing for justice. Philanthropic investments in talent and operations are underwhelming, making it difficult for projects to even get to the point of considering independence. The challenge is amplified for Black-led nonprofits with 76% smaller unrestricted net assets than white-led nonprofits.

More and more, funders are offering capacity-building programs to support their grantees. However, these capacity-building programs are often quite limited, as Melissa DeShield writes in NPQ:

“funders’ assessments of the skills and competencies nonprofits need to build are misinformed, or they are overly informed by funders’ own preferences.”

Without additional resourcing from philanthropy, it’s unlikely that additional services will be offered by fiscal sponsorship to support projects in gaining the lived experiences they need to establish an independent tax-exempt nonprofit. Any effort by fiscal sponsors to support expanded programming without additional support from philanthropy would increase costs to fiscally sponsored projects and likely result in a reduction of other key services provided by fiscal sponsors.

Fiscal sponsors need to hear from their projects that expanded services are essential to maximizing their impact as a future independent nonprofit. At the same time, philanthropy should work with both fiscal sponsors and projects organizing for justice to resource expansion programs that meet the above-mentioned challenges.

Collectively, we need to recognize that this gap in the fiscal sponsorship model exists and that if the gap remains unfilled, the work to overcome these challenges is arduous and burdensome on projects organizing for justice, requiring a significant amount of time, resources, and energy.

Leaders that have gone through this process, I want to hear from you. Please share your stories with me 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.

At Cooperative Impact Lab, we are working on building a bridge for fiscally sponsored projects ready for the next step — and we want to build it in partnership with leaders, fiscal sponsors, and philanthropy. If we are truly to prioritize the autonomy, independence, and resiliency of projects and nonprofits on frontlines, we must prioritize infrastructure to support fiscally sponsored projects ready to take the next step towards autonomy and self-governance.

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 at https://www.cooperativeimpactlab.org/contact if you’re interested in being a part of this project!