Everything You Ever Wanted to Know About Fiscal Sponsor Transfers…But Were Afraid to Ask

When we started this work a decade ago, one thing we did not expect to discover is that projects sometimes transfer from one fiscal sponsor to another. Looking back, it shouldn’t have been surprising — there are a number of very good reasons why a project might leave its current fiscal sponsor and move to a different one — and after helping dozens of projects decide what their best next step is, we want to share some of our learnings to help you understand what may be best for your project.

What is a Fiscal Sponsor Transfer?

Quite simply, this is when a fiscally sponsored project (FSP) leaves one fiscal sponsor and moves to another fiscal sponsor.

Why do fiscally sponsored projects transfer from one sponsor to another?

Usually a sponsored project transfers for one of two (sometimes overlapping) reasons:

1. The project is no longer compatible with its current sponsor but still is best served by staying under fiscal sponsorship. This incompatibility can be the result of a single, acute issue (things like losing a large donation or not allowing a project to hire staff) or the result of one or more ongoing or chronic issues (things like disagreements over shared cost rates, perceived lack of transparency in sponsor operations or an overall loss of trust in the relationship).
2. They “outgrow” their current sponsor — usually, but not always, this happens when a project starts at an “ad hoc” sponsor and has early success, resulting in needing more support and a better defined relationship.

It’s important to note here that, just like with project separations/spin-outs or terminations, sometimes it’s the sponsor that drives the change. In other words, sponsored projects can be “asked to leave” or the decision can be mutual — this determination isn’t always 100% made by the project.

What should projects consider when deciding whether or not to transfer to another fiscal sponsor?

Depending on the size/scope and complexity of the project, there are many different considerations that could come into play. Here are some of the major ones we see again and again:

1. Shared cost rates are not the end-all, be-all
2. While the current sponsor does some things you don’t like, they also likely do a lot that you do like — so keep that in mind when looking for a new sponsor (i.e. the grass is not always greener)
3. If you have W2 employees that receive benefits from your fiscal sponsor, those benefits will almost certainly be changing — and even if you move to a sponsor with comparable (or better) benefits, it will be a disruption to your employees (at the very least, their health insurance deductible(s) will be reset unless the move happens within a very narrow window towards the end of the year)
4. Many sponsors will charge an entry fee — usually (but not always) a percentage of the funds you are bringing with you
5. Some sponsors may also charge an exit fee to wrap up your accounts and close out all of your activities
6. Especially if you have W2 employees, the process will probably take longer than you realize — and it will require your current and future sponsors to coordinate across a number of different areas, so you shoud factor that into your planning and decision-making

When considering a transfer, when does it make more sense for a project to get its own 501(c)(3)?

This is a question that a lot of FSPs consider when deciding to leave their sponsor. Like most questions about complex situations, the answer is usually “It depends.” From our perspective, the answer to this question really comes down to a few key points:

• Are there immediate timing considerations? (i.e. if the project needs to move quickly and hasn’t yet filed its Form 1023/received its determination letter from the IRS, exiting fiscal sponsorship altogether may not be a feasible option)
• Are there better fiscal sponsorship options for the project? (i.e. fiscal sponsors who would be a better fit)
• What is the project’s overall readiness to stand on its own?
• Does it make financial sense to remain under fiscal sponsorship for at least another two years (or more)?
• Will the project be in a better position to go out on its own after those 2+ years have passed?
• Does the project have the funds to support the costs of going out on its own? (especially through the transition and in the first 2-3 years when costs are likely to increase)
• How do the costs of moving to a new sponsor compare with those of the project going out on its own?

Usually, answering “yes” or “no” to any single one of these questions won’t make the decision (save for maybe the first one) and the combined answers to all of these questions should ultimately point your project in the right direction.

To wrap up, there can be really good and important reasons for your organization to leave its fiscal sponsor and but keep in mind there will be real costs — both tangible and intangible — that should be kept in mind as you move through the decision-making, and transition processes.

If you need help finding a new sponsor, navigating the decision-making process or understanding the landscape, please get in touch with us and take a look at our Resource Hub for Fiscally Sponsored Projects for more information from across the internet.