Fiscal Sponsorship Pitfalls

Tuesday February 23, 2021 comments Tags: nonprofit, accounting, fiscal sponsorship, sponsorships, shenanigans

Any accounting business and tax advice contained in this podcast is not intended as a thorough in depth analysis of specific issues. Nor is it a substitute for forming information. Nor is it sufficient to avoid tax related penalties. If you have specific questions that you need advice for, be sure to schedule a strategy session and not solely rely on information in this podcast. All right, back to the episode. Are you a nonprofit leader, wanting to get a better handle on your finances and how the mission and the money are connected? Check out impact basics. It's a 12 week course that combines an online learning platform with live instruction. So you'll have your modules that you can go through at your own pace and then there are office hours where you can bring any question from the modules or what's happening in the day to day for your organization that we can work through together. The next cohort starts soon so be sure to check out the link in the show notes to get more information. 

Hey, it's Chyla Graham and this is another episode of the Nonprofit Nuggets Podcast. This season is all about shenanigans mismanagement, misappropriation and misbehavior as reported by the news, we are not saying whether or not these organizations are in the right or wrong, but 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 organizations who aren't ready to make that step and make that application. They help them on the back end. So the grassroots organization presents a project and will do all the work and the fiscal sponsor will do the paperwork side. They do the financials, the record keeping, they are the employer for employees, and they typically charge a fee for that. In this case, concern is that the financial records were not in order. There could be some commingling of funds. As a project, 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. Interview three fiscal sponsors to see which one is the right fit for your needs and ask questions, 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 the programs 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, they 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 with addressing questions from the finance 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 so if that is something that you're like, hey, I'd love to talk to someone and I don't know who reached out to me. I will check to see if they're comfortable being put in contact to just have that general conversation about what does Fiscal Sponsorship feel like? 

Alright, so maybe you are the fiscal sponsor? And 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 a 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 expected that that project is planning on doing its own financial statements. 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 going to 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 will set you up for that. 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 who can give us good reporting. 

One great tool that you might want to check out is precise grants. So precise grants.com, I want to say it's a website, 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 could easily segregate. What would what would it look like if you did not have these programs versus when you do have, not those problems, but with those projects? 

So that is how I recommend from a Fiscal Sponsorship perspective is 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 is a clear chain of communication, there's a clear outline of what the expectations are. So this should not surprise that you're not frustrated that this thing didn't happen, well, you might still be frustrated 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 to 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 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. Bye. Thanks for tuning in to another episode of the Nonprofit Nuggets Podcast.

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Link to Article: Inspector General opens investigation into Strong City's handling of grantee money



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