How can the philanthropic sector best identify and support promising new initiatives? A different way to ask the question is what’s the difference between a ham sandwich and a new public charity? Not much these days as far as the IRS is concerned as there is no meaningful vetting being done on new applicants filing the Form 1023-EZ.
For those not familiar with the 1023-EZ, it is an ill-advised solution to address the previous astounding backlog of public charity applications sitting with the IRS. Thought leaders in the field fear this open door policy will greatly dilute what it means to be a public charity and cause a myriad of problems down the road.
So, how can foundations and other mindful donors interested in supporting new and promising charitable initiatives separate the promising wheat from the chaff and ensure these groups are effectively navigating a complex compliance environment? One increasingly utilized solution is fiscal sponsorship, more specifically comprehensive fiscal sponsorship where the charitable initiative is positioned and supported as a semi-autonomous program or business division of an established nonprofit for the duration of the relationship.
Why does this help anyone you ask? For starters, when done right, the fiscal sponsor has a seasoned board of directors committed to the success of both their immediate organization and all projects operating under their purview. They vet potential partners not only on mission compatibility but also assess risk profile, and sponsors work closely with the project to ensure continual movement towards sustainability while not inadvertently driving off a compliance cliff.
Once a fiscal sponsorship relationship is established, projects benefit from the flexibility and experience of experienced nonprofit professionals; the most common supports being financial management and oversight, legal compliance, risk management, and human resources and benefits administration. A growing number of sponsors also provide additional capacity-building supports such as trainings, coaching and, eventually, succession planning. Fiscal sponsors are not profit-making centers but need to cover their costs and typically do so via an overhead cost allocation. To determine if the cost allocation is reasonable, be sure to take a close look at what supports the project receives.
The fiscal sponsorship incubator approach described above is exactly how the Massachusetts Nonprofit Network (MNN) began its journey. MNN operated under TSNE for its first three years so it could focus on business model development and internal capacity building while TSNE shouldered the administrative and compliance burdens. Once it had built its own infrastructure, it transitioned to independence and all assets held by TSNE for the benefit of MNN were transferred to the new entity to be deployed in advancement of MNN’s mission.
In sum, well-vetted and nurtured nonprofits change the world. The turnkey model of comprehensive fiscal sponsorship serves both as a runway for groups such as MNN and as a long-term home for thriving initiatives where the need for independence is less compelling. Because of this unique relationship, fiscal sponsors have a vested interest in the long-term success of those they partner with whether the legal relationship lasts for a few years or a few decades.