End a Fiscal Sponsorship
How do you end a fiscal sponsorship relationship? Can you switch fiscal sponsors?
If you’re looking to end a fiscal sponsorship, it can be daunting to untangle the project (sponsee) from the fiscal sponsor. But change is possible. It could be that your project has gotten its own 501c3 status or you’re transitioning to another fiscal sponsor. No matter the reason, it’s important to follow the proper steps to end the fiscal sponsorship legally to ensure both organizations have what they need to be compliant with the law.
How do you end a fiscal sponsorship?
First and foremost, check your fiscal sponsorship agreement. Every fiscal sponsorship should have a written agreement signed by both parties that details the nature of the relationship. The agreement should include provisions for how much notice is needed to end the fiscal sponsorship.
Some fiscal sponsors are able to end their relationship with a sponsee quickly if there is any sort of legal or ethical violation. But in more common cases, whether the sponsee or the sponsor is ending the relationship, there is a period of time outlined in the agreement to wind down. Typically, the more intertwined the charitable project and the organization are, the longer it takes to untangle all the necessary pieces to unwind the fiscal sponsorship. Though in a less involved model, like Model C, the relationship can often dissolve quickly if needed.
The agreement should detail how to provide notice that you’d like to terminate the sponsorship. At that point, it is up to the fiscal sponsor to communicate the steps necessary to wind down. For many sponsors, this involves disbursing any last funds that were donated for the purpose of the sponsee, and ensuring all records of the sponsee’s charitable activities and financials are complete and up-to-date. Keep in mind, if the sponsee has grants in progress, you’ll need to communicate the change to your grant provider. You’ll also need to communicate the change to any recurring donors and get monthly donations transferred to either your own donation platform or the new fiscal sponsor if the sponsee is transferring from one fiscal sponsor to another.
What do I need to know when ending a fiscal sponsorship?
When ending a fiscal sponsorship, it’s crucial to handle donations and finances properly to protect both the sponsor and sponsee organizations from any liability or financial penalty. If the sponsee now has tax exempt (or 501c3) status on their own, any remaining funds set aside for their charitable program can be disbursed to their organization. However, if the sponsee does not have tax deductible status, the situation becomes more complex. Because the donations are tax deductible donations for charitable purposes, they must be used for charitable purposes (according to the IRS’s definition of charitable). If the charitable project has another fiscal sponsor, donations can be transferred from one fiscal sponsor to another. But if the charitable project does not have tax exempt status or a new fiscal sponsor, donations will still need to go to permissible charitable purposes. Some fiscal sponsors account for this scenario in the fiscal sponsorship agreement, so be sure to check that document first. Many fiscal sponsors will allow donations to be transferred to a similar charitable organization. If your fiscal sponsorship agreement allows this, you can often have the funds donated to a similar 501c3 organization or a sponsee with a similar charitable program. Some fiscal sponsors will keep those funds to use for their own charitable purposes.
Another factor to keep in mind is any ongoing grants. If a fiscal sponsorship ends during the middle of grant funding, you’ll need to notify the grant provider. Many grant providers are happy to help in the transition if the sponsee has received 501(c)(3) status. But keep in mind, it’s wise to check in with grant providers prior to the change, as some will not want to change the relationship in the middle of the grant cycle.
What should I know before switching from one fiscal sponsor to another?
If your charitable program is looking to change from one fiscal sponsor to another, doing your research is the first step. Check with the new potential fiscal sponsor about:
1. What kinds of programs does the potential new sponsor accept?
Each fiscal sponsor has choice over which projects they fiscally sponsor. So the first step is to ensure your program meets the guidelines of a new potential fiscal sponsor. Some sponsors will only serve a certain geographic area or type of organization. You can often check these requirements on Fiscal Sponsor Directory, a great free resource for those looking for a new fiscal sponsor. If you’re curious about our requirements for charitable programs, you can see them here.
2. What services does the new sponsor provide? What’s the cost?
There is a wide range of sponsorship services available. Some fiscal sponsors provide full bookkeeping services or administrative services, but often those come at a higher cost. In this type of fiscal sponsorship, the sponsor will often charge a setup fee initially and then 5-12% of whatever donations come in towards the sponsee’s project. Other fiscal sponsors provide fewer services, but will still send out donation acknowledgements to all donors and communicate with grant providers as needed. Check to see if the services the sponsor provides are both meeting your organization’s needs and your budget. Fiscal Sponsorship Allies charges just 2.89% of donations, contrasting the typical 6-8%.
3. What reporting requirements does the new sponsor have?
Will you be able to fulfill the sponsor’s requirements? Each fiscal sponsor can require a different amount of information or oversight. Most fiscal sponsors will require some financial reports and narrative reports on your charitable activities. Some fiscal sponsors require you to submit your expenses to them before you’re able to utilize funds. Others disburse funds in a lump sum but require more detailed reporting monthly or quarterly. Each sponsor is different, so be sure you understand the requirements you’ll need to meet in order to be compliant with their program. You can see the Fiscal Sponsorship Allies’ requirements here.
4. What does your current fiscal sponsor require from you before switching?
Before making a change, check the agreement with your current sponsor. Do they have a policy for transferring from one sponsor to another? Do they require a certain amount of notice? Do you have any ongoing grants or monthly donations? How will those be handled during the transition? These are the types of questions you’ll need to get answered by either the agreement or the sponsor. You should also check in with the new fiscal sponsor to help coordinate the transfer. Though there will be some financial and administrative burdens during the transition, if your organization has found a better sponsor for your needs, the long-term benefit can outweigh the short-term headache.
The rule of thumb is to let your fiscal sponsorship agreement guide your transition. Whether your organization has newly received 501(c)(3) status or you’re transferring from one sponsor to another, communication is key to ensuring compliance and a smooth transition. If you’re looking to switch from another fiscal sponsor to Fiscal Sponsorship Allies, let us know in your application. We’ve helped numerous organizations make the switch from another fiscal sponsor to our fiscal sponsorship program.