Cultivating a Beneficial Relationship Between a Fiscal Sponsor and an Organization

Tuesday February 14, 2023 comments

Any accounting, business or tax advice in this era podcast is not intended as a thorough in depth analysis of your specific issues. It's not a substitute for a formula opinion, it is not good enough to avoid tax related penalties. 

Misbehavior, as reported by the news, we are not saying whether or not these organizations are in the right or wrong. We are wanting to share how you can prevent yourself from being in the news for similar activities. So what can your organization do to not fall into some of the same risks and be subjected to some of the same concerns as the people in the news. So this one is out of Baltimore. 

The title of this was Inspector General opens investigation into Strong City’s handling of grantee money. So in this case, we're talking about a fiscal sponsor. If we've talked before, and you're new to the nonprofit arena, I have always said like, hey, check out another organization, maybe a fiscal sponsorship is the right place to go. 

Fiscal Sponsorship is when another organization uses their 501-C3 status to help. Maybe some grassroots, some other organizations who aren't ready to make that step and make that application. They help them on the back end. So typically, the project so this is the grassroots organization, per se, the project will do all the work and the fiscal sponsor will do the paperwork side. So they do the financials, they do the record keeping, they are the employer for employees, they typically charge a fee for that. 

So in this case, concern is that the financial records were not in order. In order there could be some commingling of funds as a project. So as a grassroots organization, who's thinking about using a fiscal sponsor, how do you protect yourself? Don't just go with a fiscal sponsor, because they were recommended by one person, maybe interview three, interview three fiscal sponsors to see which one is the right fit for your needs. 

Ask a lot of questions. Because again, even though it's going to be their name on things, you're the face, you're the one out in the streets, getting the donations talking about programs and so you want to make sure that you're comfortable with what's happening. So how do you do that? You can interview other people who are under their fiscal sponsorship, that you should be comfortable telling you, like, Oh, these are some other projects that we sponsor, so that you can ask them like, well, how often do you get financial reports? How are they addressing questions from the financial report? How much support do you feel like you get the back end work? So those are the types of questions that you should ask. 

We actually do have a client who does use a fiscal sponsor. And so if that is something that you're like, Hey, I'd love to talk to someone and I don't know who. Reach out to me and I will check to see if they're comfortable being put in contact to just have that general conversation about like, what does Fiscal Sponsorship feel like? All right. 

So maybe you are the fiscal sponsor, you're like, Well, how do we prevent being the organization in this situation? This is another case of having a good accounting system. So making sure that you're using a system or program that can fully support you and all the projects that you want to use. There are some organizations who find like, oh, we just want to show a liability. If that is the case, if you're showing it only as a liability. I suspected that that project is planning on doing its own financial statement, they're planning on doing their own 1099. They are actually keeping their own accurate records so that they can submit to the IRS and that way, you're not duplicating the revenue that's being reported. 

If, however, the project is saying like, Nope, we don't plan on doing any of that. We want you to manage all of it. We're putting this money in your name, we're gonna spend it for you from the bank account. What you do in that case, is create classes or create departments and get a system that would set you up for that. What you can do in that case is, depending on your software, make sure that that setup so, this is your past the spreadsheet phase at this point, you're using QuickBooks, if that is the right fit for you, or you're thinking of something more robust, maybe not as far up as Great Plains, but finding the right middle ground of like, who can give us good reporting, one great tool that you might want to check out is PreciseGrants. 

So, they do have some management tools that can break out budgets for you and that might be something that you can think about for any projects for your fiscal sponsorship. But what you want to be able to do is be able to show each project their own individual activity. How much did they bring in? How much are they sending out? That way, you are aware of the happenings when your financial statements go out. They're fully accurate, and you can easily segregate. 

What would it look like if you did not have these programs versus when you do have those programs? So that is how I recommend from a fiscal sponsorship perspective, it's like how do you do that? You want to make sure that your financial system is adequate enough to handle all of those things. 

The challenge for both sides of this is going to be documentation. So you want to make sure that you have a clear system set up in the beginning on who is responsible for getting data to who. What is the timeline for reporting back, who at the project is going to review the reports, who at the fiscal sponsor is going to be responsible for answering questions. That way, there's a clear chain of communication, there's a clear outline of what the expectations are. So that you're not surprised that you're not frustrated that this thing didn't happen? 

Well, you might still be frustrated, because if it doesn't happen on track, but at least you understand, like, what do I do next? If this doesn't happen, have that outline, have that communicated clearly so that you do not feel like this was a terrible decision. 

I don't want anyone to shy away from the idea of using a fiscal sponsor or being a fiscal sponsor. So instead really think about what do we need to have in place instead, to make sure that this is going to be a smooth process that it's going to be beneficial for both parties. All right. Have a good day. Please don't end up in the news for something like this.


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Inspector General opens investigation into Strong City’s handling of grantee money