Fiscal Sponsorship: How to Avoid Risk

Some of you may have heard or read about the recent collapse of the California-based fiscal sponsor International Humanities Center (IHC), documented in detail by Rick Cohen and the Los Angeles Times.

Some of you may have heard or read about the recent collapse of the California-based fiscal sponsor International Humanities Center (IHC), documented in detail by Rick Cohen and the Los Angeles Times.

To me and the other members of the Steering Committee of the National Network of Fiscal Sponsors (NNFS), this story was a reminder that as evangelists for this poorly-understood field, we need to redouble our efforts to help the nonprofit sector – funders and practitioners alike – understand the differences between responsible practices and risky ones.

Fiscal sponsorship, when done right, is a tremendously valuable, highly efficient way to build community social capital. In its most typical iteration, called comprehensive fiscal sponsorship, the non-profit sponsor assumes legal and financial responsibility for the activities of groups engaged in work that furthers the sponsor’s exempt charitable purpose, acting as a kind of umbrella for those activities.

Fiscal sponsorship allows new ventures to get off the ground quickly and efficiently, without the complications associated with incorporating and filing state and federal applications for tax exemptions. Fiscal sponsors also conserve charitable funds by providing a streamlined set of accounting, insurance, payroll, personnel and other systems (essentially one unified “back office”) to many different projects, with higher quality and at lower cost than if each of those ventures operated separately.

Because sponsored projects are not separately incorporated, startup and wind-down are straightforward, making sponsorship an attractive option for social entrepreneurs. In addition, a larger pool of employees enables sponsors to provide better benefits at a lower rate than groups could obtain on their own.

Exercise Due Diligence

At the same time, because of the legal and financial responsibility that sponsors assume, it’s a relationship that demands the exercise of due diligence on both sides. Project staff are employees of the sponsor and project activities are legally the sponsor’s activities, so it’s essential that sponsors have well-designed training, monitoring and compliance systems as well as insurance coverage broad enough to cover all sponsor and project activities.

On the other side of the ledger, projects depend on the sponsor to receive and properly account for all funds and provide up to date reporting.

Be Aware of the Risks

Unfortunately, many organizations offering or considering fiscal sponsorship as a service do not appreciate the risks associated with it and many groups looking for a solid, reliable fiscal sponsor lack the capacity to conduct the necessary due diligence. According to published reports about IHC, there were as many as 240 groups under its umbrella, many of them quite small. And it appears that neither IHC’s business model nor its internal systems were up to the task of managing such a large number of projects. Many of these groups have learned that funds – in some cases hundreds of thousands of dollars – which they raised and entrusted to IHC are gone.

The good news is that NNFS several years ago developed an excellent, detailed set of guidelines and recommended best practices – available from the NNFS website – designed to help groups seeking a fiscal sponsor as well as organizations considering offering the service. I urge anyone thinking about becoming or affiliating with a fiscal sponsor to study this document carefully.

Fiscal sponsorship is a great vehicle for facilitating local, regional and national community building – but only if it’s done the right way. 

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