Non-Profit Law blogger Gene Tagaki recently tweeted a link to an article he wrote for the American Bar Association about 5 years ago urging lawyers to consider alternatives to forming non-profits organizations for their clients.
I should note that this article was written before the first Benefit Corporations were legal in the U.S. so that also remains an option to forming a non-profit.
One of the biggest considerations for not forming a non-profit is the fact that there are so many, with more being formed every day, but an ever shrinking supply of funding to support their efforts.
“Ron Mattocks, author of Zone of Insolvency: How Nonprofits Avoid Hidden Liabilities and Build Financial Strength, asserts that as many as one-third of the nation’s 1.4 million registered nonprofits operate in the zone of insolvency.
If a nonprofit is insufficiently prepared to compete and operate in such an environment, the end product may be gross inefficiencies, frustrated founders, disillusioned donors, and fewer resources ultimately reaching its intended beneficiaries.”
There is also the issue of whether the founders have a realistic business plan that is viable amid the economic conditions present. Takagi also spends some time cautioning against founder’s assumptions of the amount of control they can legally exert over the organization.
Among the alternatives to forming a non-profit Tagaki suggests is actually working with an existing non-profit. I often wondered, if people are able to muster the resources to create an entirely new non-profit that overlaps or competes with an existing one, why not first approach the existing non-profit first proposing to enhance their efforts with an ancillary or complementary program.
That is pretty much what Tagaki suggests:
When appropriate, lawyers should make their clients aware of the following benefits of working with an existing nonprofit:
-Avoidance of start-up costs and administrative burdens of a new nonprofit.
-Increased efficiency in furthering the charitable mission by using an established infrastructure.
-Opportunity to gain experience and expertise in running a nonprofit.
-Development of connections in the nonprofit community.
Collaborating with an existing nonprofit is an alternative that may be considered even where the contemplated charitable idea is not currently being implemented by an existing nonprofit. A nonprofit with a compatible mission may be receptive to implementing and operating a new program, particularly if a volunteer is willing to bring resources to the table. Alternatively, the nonprofit may have institutional knowledge relating to the charitable idea and its implementation. Moreover, the nonprofit may open doors and leverage assets that might not be otherwise readily available, such as
-Existing resources, including staff, volunteers, infrastructure, and systems.
-In-house experience and expertise, which may allow the contemplated program to be launched and operated efficiently and in compliance with the law.
-Donor and business relationships, including with institutional funders, nonprofit leaders, allied organizations, and the media.
-Goodwill, which may provide the program with name recognition and built-in public trust.
The other alternative he suggests is a Fiscal Sponsorship where a project is housed within the auspices of an existing non-profit. It allows the project to take advantage of the non-profit’s status without needing to create a separate entity. If the sponsorship agreement is written correctly, the project has the freedom to move to another non-profit or perhaps spin off as a separate non-profit once they have experienced sufficient growth. Fiscal sponsorship arrangements have been used to host short term projects or as an incubator for fledgling non-profits.
The Sponsor usually retains a portion of the gifts as a fee (5-10 percent is common) and allocates the rest to the Project. The Project Initiators may serve as employees or volunteers of the Sponsor delegated with the responsibility of operating the Project. They also may retain the right to move the Project to another Sponsor or to a new exempt organization created to permanently house the Project. Any such rights should be precisely spelled out in the fiscal sponsorship agreement.
Fiscal sponsorship may provide a Project with immediate tax-exempt status, advantageous treatment as a public charity (i.e., nonprivate foundation) without independently passing a public support test, some degree of administrative support, and a governing body that has a duty to ensure that the Project is operating in compliance with applicable laws. The Project Initiators must weigh such benefits against a lack of autonomy; their limited control over the Project, which remains under the ultimate control of the Sponsor; and the sponsorship fees.
The trade-off aside, if a fiscal sponsorship agreement is written well it can be an extremely helpful process of essentially testing the viability of a concept and learning how to run a non-profit organization without incurring the start up costs.
I was not aware that this option really existed. It might almost be better if aspiring non-profits pursued this option more regularly. Even if it didn’t result in new organizations spinning off all that often, it could potentially create more robust non-profit organizations. (Perhaps even resulting in more nimble sponsored programs growing to subsume their nominal sponsoring parent.)
Since the fiscal sponsorship option is relatively unknown as an option, perhaps the biggest hurdle will be getting both parties prepared and willing to engage in such an arrangement.
It is well known that non-profits start new programs in order to garner funding to support their main goals. It would be easy for a sponsoring organization to starve the program it agreed to house of the resources it needs to succeed. From the other side, as Tagaki mentioned, once you bring your program under the auspices of a fiscal sponsor, their priorities need to become your priorities to a large degree.