Sunday, March 23, 2014

The Danger of Fiscal Sponsorship

I am stunned by the number of organizations I encounter that operate under the umbrella of another organization. Beware! This arrangement will strip your branding and will leave you at square one to restart your organization if you ever do break free. This excerpt from page 39 of Defying Poverty with Bicycles shows why you should avoid fiscal sponsorship:

“...In the U.S. and some other countries, the leaders of a new organization can choose to avoid incorporating by asking an incorporated nonprofit to become their ‘fiscal sponsor.’ This can look very enticing to new leaders who are already overwhelmed by all the tasks required to found an organization.

But don’t be deceived! Fiscal sponsorship becomes a cozy arrangement that is very difficult to escape. The most harmful problem with fiscal sponsorship is that the ‘mother’ organization must be mentioned in all communications. Also, all checks and credit card payments that go to your organization must be made payable to the mother organization, not yours. This means that all of your donors, grantors and customers will relate their experience with your program to the fiscal sponsor. If you and your fellow leaders eventually manage to break free of this fiscal sponsorship (and that’s a big if), none of these important people will have any connection to your organization. In other words, once you break free and incorporate your organization independently, it will be as if you are starting from day number one.

The other danger of fiscal sponsorship is that the fiscal sponsor, or mother organization, does all the administrative work, including taking the credit for your organization, and simply charges a fee such as ten percent of all income that comes to your organization. This is of course fair because otherwise an established nonprofit could not justify taking on the burden of being a fiscal sponsor. Also, because of the high level of responsibility they have for your organization, you and your team will have to hand over some leadership of your organization to them.

Once you and your team have settled into this arrangement, most of you will be tempted to remain there in order to avoid the responsibility of learning how to do tax returns and sending reports to your funders. I know of some nonprofits that have operated under fiscal sponsorship for more than a decade and I can easily bet they will never break free. They will also remain small—the ones I know of are either run by volunteers or have just one, underpaid staff member.

The most important danger of fiscal sponsorship in regards to Social Bike Business is that it will not allow the full implementation of the program. No fiscal sponsor would take on the responsibility and administration of such a complex program. Then consider that everything that includes the name of your organization must also show the name of the fiscal sponsor in order to give full disclosure. Imagine the sign you’ll hang on the front of your bicycle community center... with two names. Imagine your brochures, business cards and custom price tags, all with two names of the organizations that run the program. Would you shop at a place with such a suspicious dual personality?

My recommendation regarding fiscal sponsorship is: Don’t do it! And if you’ve unfortunately slipped into this cozy yet dangerous situation: Get out as soon as you can!”

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