Fiscal Sponsorship Separation, Part 3
Welcome to the third post in Schulman Consulting’s Separation Series focused on the experience of separating and all that goes into it. I’ve created this series because while there is lots of information available on the legal definitions of fiscal sponsorship and how it technically works, there is not a lot available about specific issues and experiences that fiscally-sponsored projects have and how to deal with them.
I want to say upfront that this post may come across as a bit of a downer, but it’s not meant to be. The point here is to make sure you’re going into the separation process — and life as an independent organization — with your eyes wide open. I’m assuming you already know all of the benefits of spinning out from your fiscal sponsor and those benefits are all still valid and meaningful. But in this post we’re going to go over some of the things you may not be thinking about.
Let’s start with the one that will probably shock you the most: corporate insurance.
Corporate Insurance is actually an umbrella term for a number of different policies you’ll likely need, depending on your location and the work that your organization does.
There will probably be at least two separate policies that you’ll need and up to as many as five or more — covering your overall organization, your Board of Directors, your employees, any vehicles owned, rented or leased by your organization, and a number of other areas.
And it all adds up.
How much are we talking about here?
Unfortunately, it’s very hard to say — even within a range — without knowing a bunch of information about your organization. (If you’re interested in hearing more about this in a future post, leave a comment below.) But, suffice to say, we’re talking in the 4-to-5 figures annually.
Why is it so much more expensive than what you’re (likely) paying via your fiscal sponsor?
A few reasons:
- In the eyes of insurers, you’re a brand new organization with zero track record. They have no way to tell if you’ll run into issues and file lots of claims or if you’ll default on your premium payments. Maybe you’ll be a model client, but you’re gonna have to prove it — and that takes time.
- Insurers also see you as a tiny, singular entity, and when you’re in the business of risk management, large, heterogenous pools of clients are much cheaper to insure than individual entities. If you have a pool of even 10 or 20 organizations under a single policy (like your fiscal sponsor does), the ‘good’ clients will almost always cover the costs that the ‘bad’ ones cause the insurer to incur. When you’re on your own, there’s no one else to cover your costs to the insurer should need to file a claim.
- You’re a nonprofit. While there are some insurers that are known for working with nonprofits, many are not — and their data tells them that nonprofits are higher risk clients than for-profit businesses.
So, what can you do to keep your costs down?
The short answer is that if you want quality coverage from a legitimate provider, you’re going to pay for it. Can you be a smart shopper and talk to different providers? Of course, but that depends on how much time you have to devote to things like this…especially with everything else on your plate.
* * * *
This goes without saying, but healthcare in this country is expensive. You feel this in your own life and now your organization is about to feel it, as well.
Depending on the levels and types of benefits that your fiscal sponsor provides for you and your employees (and what your team takes advantage of), want to look at providing multiple types of insurance — medical, dental, vision, life and accidental death & dismemberment (AD&D) — and possibly even a retirement savings plan. There are other types of benefits, as well, but these are the main ones that most organizations are going to have to consider.
For the same reasons as corporate insurers, benefits providers prefer established entities with a proven track record that employ a larger, heterogeneous group of employees as opposed to smaller groups filled with people of similar ages and in similar situations.
So, once again you’re at a disadvantage.
The main differences here are:
- The Affordable Care Act (also known as “Obamacare” in some circles) has made it possible for some organizations to get through their medical/dental/vision insurance for lower rates than previously available. [Edit – with the ACA in flux, this may not apply anymore]
- You have the option to pass some portion of these costs onto your employees. Just be prepared for some unhappy staff if you start asking them to pay for more than they are used to paying.
Once again, there’s no real way around paying these costs — healthcare is expensive, no matter how you slice it!
* * * *
A great accountant can be a true strategic asset to your organization. They can do a lot more than produce your monthly/quarterly financial statements and file the right forms with the IRS. They can be a key advisor, assist in cash management and help mitigate risk. There are even some that specialize in working with nonprofits.
But all of that comes at a cost.
Many newly-separated organizations start with a lower-cost bookkeeper to do the minimum to get by. And for some, that’s enough. For most, though, I’d recommend you at least engage an accountant on a consulting basis to help you see the bigger picture and make the best decisions you can for your organization.
* * * *
In exchange for being exempt from income and other taxes, the IRS and many states impose a number of requirements on nonprofits. One of the biggest which is the annual audit.
If you’ve been part of the nonprofit world for a little while, you’re at least somewhat familiar with “the 990” (officially known as the Form 990, for more info from Guidestar, click here). And if you’re not familiar with it, it’s basically the ‘federal tax return’ for nonprofits.
In order to do its part to ensure that your financial reporting is “materially correct,” some states require a third party (aka the audit firm) to perform an annual audit of each nonprofit’s finances. And no, your year-round bookkeeper or accountant can’t perform the audit as part of their services, although they can prepare the 990. A separate accounting firm must be hired to do the audit. Most accounting firms perform audits, and some specialize in nonprofits.
Your state may also go a step further by requiring someone other than the organization’s Executive Director or a member of the staff choose the audit firm. If so, that job typically falls to the Audit Committee, who must vet, hire and manage the overall relationship with the audit firm.
That doesn’t mean you and your team won’t be involved in the audit — you, your team and your bookkeeper will need to provide the auditor any and all relevant information and probably need to spend a fair amount of time with them.
Now, if there is a silver lining here, it’s that you probably won’t have to get this going right away after you separate. It’s all dependent on the timing of your separation and the amount of money you raise, what state(s) you operate and solicit donations in, if you receive federal funds, among other factors — but you should have a little bit of time to get your bearings. (For some additional information on how to determine if you may need to do an audit, start here.)
So, in addition to the time you, your accountant and your staff will need to put in with your auditors, what is this going to cost your organization?
The final price is dependent on your location, the size of your organization and the type of work you do, but expect it to run at least $5,000 and up to $20,000 or more.
(Special thanks to Anne Freiermuth of Mission Math for her assistance with this section.)
* * * *
This one is probably the least surprising — lawyers are expensive, right?
But you’re probably thinking, “Can’t I get a lot of what I need pro bono?”
The answer is emphatically YES and you should make every effort to do so. There are number of places where you need to (or at least should) get legal advice — most importantly reviewing all of your contracts (before you sign them!).
But if, for whatever reason, you’re not able to secure pro bono legal services — expect to pay for them. The protection and peace of mind you’ll get from having an attorney to advise you and your organization are definitely worth it.
* * * *
You’re now more prepared than most for some of the big expenses that are coming your way if you’ve decided to separate. And if you’re feeling overwhelmed and would like some help, send us an email or read about how we help clients through this process.
If you’re a leader of a fiscally-sponsored project that separated, what was the biggest expense you encountered? Any that aren’t listed above? If you’re planning to separate or thinking about separating, which expenses are you dreading the most? Please share your experiences by leaving a comment below.
* * * *
Next Up: Now that we’ve talked about the reasons why projects separate, looked at the steps in the separation process and gone over some of the surprising hard costs of becoming an independent 501(c)(3), we’re going to dive into the hidden costs of separation. Click here for next post in this series.