How to Accelerate Your New EA Organization with Fiscal Sponsorship and Operations Support

This post is primarily written for people who are considering, or are in the process of, starting a new nonprofit organization, especially those who are concerned about the operational aspects of running the project. Forming a new organization can be a daunting prospect, and finding the right fiscal sponsorship or operations support provider can significantly lower the bar for setting up a new org.  

In my experience, there is limited awareness and understanding of these services within the EA community, which encouraged me to create a post like this. There are many, many great projects that are yet to be founded, and my hope is that increased awareness of the benefits of these services encourages more prospective founders to take the leap into entrepreneurship.

Summary

What these terms mean:

• Fiscal sponsorship: Leverage another organization’s existing legal and tax-exempt status (such as 501(c)(3) status in the US), rather than establishing a new tax-exempt entity. This is also called ‘fiscal hosting’ in the UK.
• Operations support: Hire domain experts on a fractional, as-needed basis to perform operational services (compliance, finance, human resources, etc.) for an organization.

Key potential benefits and drawbacks:

• Fiscal sponsorship = Instant initial infrastructure: Fiscal sponsorship significantly reduces the cost and time required to start doing object-level work by avoiding the need to create and operate a new tax-exempt entity.
• Operations support = Ongoing support from specialists: Operations support provides additional organizational capacity and allows efficient access to a wide variety of skill sets.
• Coordinated expert capacity - Hiring comprehensive operations support, or fiscal sponsorship plus operations support, can yield additional benefits when a service provider works cross-functionally in an efficient and synergistic way.
• Potential Drawbacks - Costs and control: Entering into a fiscal sponsorship agreement and hiring operations support may incur significant service costs. Fiscal sponsorship, in particular, may slow down decision-making and restrict flexibility around key tasks such as financial management, hiring, and traveling, due to the fiscal sponsor’s governance process and policies.

Due to the benefits and costs, fiscal sponsorship and operations support tend to have outsized benefits for newer and smaller organizations. 

• New organizations generally benefit more from the ‘instant infrastructure’ of fiscal sponsorship and find the limited flexibility less costly. For a new organization already facing a huge amount of other decisions, having some functional structure and process in place quickly and easily can be much more valuable than having it be perfect.  On the other hand, organizations that already have an existing legal structure and tax-exempt status may not benefit as much from fiscal sponsorship. 
• Smaller organizations often benefit from operations support, where part-time contractors can provide expert capacity (or even coordinated expert capacity) across a variety of skill sets in a way that’s more cost-efficient than a full-time operations employee. Conversely, a larger organization that requires more than several full-time operations staff may see less benefit from operations support as they are able to hire for more specialized operations roles internally.
• New organizations may choose to start off utilizing fiscal sponsorship and operations support services to get up to speed quickly and then, over time, reduce their reliance on external support providers as they build internal capacity, scale, and expertise.

Disclosures: I have tried to provide a balanced view of fiscal sponsorship and operations support, but note that I work for Rethink Priorities’ Special Projects team which provides these services. All views are my own and not necessarily endorsed by Rethink Priorities. My views have primarily been shaped by my own experiences and may not apply to all fiscal sponsors or operations support providers, especially those that operate outside of the US.

Fiscal Sponsorship: Instant Infrastructure

Fiscal sponsorship can provide a foundation for an organization much quicker than the time required to build everything from scratch. For the fiscal sponsee (“fiscally sponsored project”), having a fiscal sponsor is like starting to build a house with the framework already in place. (Image credit: DALL-E 3)

Definition of fiscal sponsorship

Per the National Network of Fiscal Sponsors, fiscal sponsorship “generally entails a nonprofit organization (the “fiscal sponsor”) agreeing to provide administrative services and oversight to, and assume some or all of the legal and financial responsibility for, the activities of groups or individuals engaged in work that relates to the fiscal sponsor’s mission…Simply stated, fiscal sponsors place responsibility for implementing programs in the hands of project leaders while ensuring appropriate fiduciary oversight.”^[1] 

There are several fiscal sponsorship models, but I will focus on Model A sponsorship, in which the fiscal sponsee can leverage the sponsor’s existing legal and tax-exempt status for fundraising and operations. In practice, this typically means:

• the fiscal sponsor accepts grants and other funding on behalf of the sponsee,
• the fiscal sponsor has ultimate control and responsibility over the sponsee’s assets and liabilities,
• sponsee staff are hired as employees or contractors of the fiscal sponsor,
• work visas, if applicable, are sponsored by the fiscal sponsor, and
• the fiscal sponsor handles certain administrative work, such as bookkeeping, tax filings, and payroll (though this may vary by sponsor and fiscal sponsorship model).

Note that in this type of fiscal sponsorship, the fiscal sponsee typically pays a service fee to the sponsor and does not usually receive any funding from the sponsor.

Advantages of fiscal sponsorship

1) Tax-exempt status

One of the primary benefits of fiscal sponsorship is greatly reducing the time and expense associated with establishing and maintaining a new legally compliant tax-exempt entity. This can significantly speed up the process for a new organization to launch and begin impactful work while realizing the benefits of tax-exempt status.

Obtaining tax-exempt status can be one of the single biggest drivers of cost savings for a nonprofit organization, assuming the local jurisdiction allows it and the organization qualifies. Depending on location, grants issued to an organization or personal account may otherwise be taxed as business or personal income, which could significantly reduce the net amount received. In addition to the tax savings on grants received, some countries (including the US) also offer donor tax benefits on donations made to tax-exempt organizations, which is a boon to potential funders.  

2) Streamlined administrative setup

There is considerable initial infrastructure required for a new nonprofit organization, such as:

• registering as a charitable organization and applying for tax-exempt status,
• establishing compliance procedures, such as completing annual federal and local tax filing,
• setting up governance processes and creating and enforcing organizational policies,
• instituting a financial management system and expense management platform,
• implementing HR/people systems, centralizing communications, tracking travel and time off, and more.

At minimum, a fiscal sponsorship offers the fiscal sponsee the ability to leverage the fiscal sponsor’s legal and tax-exempt status, so it is unnecessary for the sponsee to create and manage a new tax-exempt entity.  Fiscal sponsors also typically have certain policies and processes (such as requiring a specific documentation process for expense reimbursements) that sponsees are required to follow, which can simplify and streamline the setup process but also may limit the flexibility of the sponsee. 

Additionally, to varying degrees, fiscal sponsors may allow (or require) that sponsees use certain software platforms, such as finance, HR, communications, travel, etc. This can save the sponsee the time costs of selecting and implementing each of these platforms, though this may also restrict the platform capabilities available to the sponsee. For example, a specific expense platform may be well integrated in the fiscal sponsor’s workflow, but cause additional complexity for the sponsee compared to other options available.

While the limited flexibility can certainly be a drawback, it is often less costly for a new organization, which is usually already facing a huge number of other decisions. During the especially capacity-constrained early days, organizations may prefer having decent, functional systems readily available over spending the considerable time necessary to select and implement more ideal systems. This situation can lead to some short-term frustrations in the instances where a fiscal sponsor’s policies and platforms are not a perfect fit for an organization (such as the previous expense platform example), but typically this leads to one of two productive outcomes: 1) the fiscal sponsee works out a reasonable compromise with the sponsor or 2) the situation becomes a learning experience for a future where the sponsored organization eventually ‘spins off’ and becomes a separate entity from the fiscal sponsor. 

3) Reputation and networking benefits

Working with a reputable sponsor lends credibility to the fiscal sponsee. The association with an established and respected fiscal sponsor can enhance the perceived legitimacy of the sponsored project.

Further, well-connected sponsors often have extensive networks and can facilitate connections with others in their network. This could lead to additional funding opportunities, partnership opportunities, and connecting with other sponsees who may be facing similar organizational challenges.

Operations Support: Ongoing Expert Capacity

Operations support can provide specialized, experienced support as and when needed. To continue with the house analogy, professional operations support is like having an experienced professional plumber, electrician, roofer, and landscaper all available to maintain the house, rather than doing it without help or hiring a single generalist handyperson. (Image credit: DALL-E 3)

Definition of operations support

Operations or operations management does not have a universal definition and has been attributed several descriptions, for example: here, here, and here. I will provide some examples of what I consider to be operations tasks for reference, though a precise definition of the term is not important for this post:

• Compliance: tax, legal, agreements, contracts.
• Finance: bookkeeping/accounting, budget management, payroll and benefits administration, purchases and reimbursements, invoicing.
• People management: staff policies and procedures, staff recruiting, onboarding and offboarding, performance evaluations.
• Other work can include communications, marketing, event planning, and more.

By operations support, I generally mean either one of these two things:

• Hired operational services, such as those listed above, from a company or individual as an independent contractor, or
• Additional support provided by a sponsee’s fiscal sponsor outside of the typical duties listed in the previous section on fiscal sponsorship.

The range of operations support can be a single task or many tasks, and the depth of support may be occasional assistance up to full ownership of the relevant workstream(s).

Advantages of operations support

While the primary benefit of fiscal sponsorship is to provide some instant infrastructure and reduce the up-front time required before an organization can focus on object-level work, the benefit of operations support is realized on an ongoing basis. By outsourcing certain activities, an organization can free up employee capacity and maintain focus on driving impact.

1) Capacity and comparative advantage

A key benefit of operations support is the ability to add capacity for handling non-core tasks, which allows other staff to focus on their comparative advantage. Operating an organization requires a wide variety of skill sets and knowledge, and it is rare for even the most talented and experienced founding teams to possess all of the desired skills and expertise required to run all aspects of an organization.

Given that there are limited hours in a day, outsourcing certain operations tasks can help an organization focus on its core competencies. Hiring operations support should not merely add capacity to an organization, but add expert capacity from an experienced professional. For example, founders without operations experience may find it difficult to evaluate and hire candidates for operations roles, so an operations support provider can help the recruiting, onboarding, and ongoing collaboration go more smoothly.  

2) Accessing expertise on a ‘fractional’ basis

In a simplified example, let’s assume that over the next year, an organization needs 2,000 hours (roughly one full-time employee equivalent (FTE) in the US) of operations support across four operations functions: compliance, finance, human resources, and recruiting. The organization may choose to either hire one full-time operations employee or contract a domain expert in each of these four functions on a ‘fractional’ basis (500 hours each, or 0.25 FTE).

It seems likely to me that contracting multiple domain experts will be more effective and cost-efficient than hiring one full-time operations person. This is primarily because there are so few candidates who have expertise and experience across this range of functions and those that do are likely expensive and highly sought after. In my experience, organizations attempting to hire for an operations role that covers all, or a significant portion, of operations work often find that they need to either compromise on paying a higher salary than expected for a candidate that meets all desired criteria or settle for a candidate who lacks the depth and breadth of expertise that contractors would bring. Another benefit of specialized contractors is that they are often more efficient in their domain than a generalist, so it may be the case that the contractors end up billing for ~5-15% less hours (highly variable and speculative) than the 2,000 expected.

Hiring operations support on an as-needed basis for infrequent or short-term tasks, such as legal advice and event planning, can also supplement an organization’s capacity in a far more flexible way than adding a new permanent employee. This flexibility may be particularly beneficial when the organization’s operational needs may change frequently, which is often the case for new organizations as they iterate and pivot to find what works. While there is some friction and cost associated with switching contractors, this is typically much less costly than replacing or drastically upskilling an existing employee.

As a specific example of the fractional hire model, consider Jitasa’s bookkeeping services. Per their website, Jitasa services 1,500+ small nonprofit organizations (including several EA organizations) with 300+ employees. Jitasa’s scale and internal skill specialization allows them to provide clients with comprehensive bookkeeping services - backed by a full accounting department’s worth of knowledge and expertise - at a fraction of the cost of one senior-level full-time employee. 

3) Compliance and risk mitigation

For small organizations that are not yet ready to hire for more specialized operations roles, there are additional benefits to hiring expert operations support for workstreams that require very broad and/or deep technical domain knowledge.

Assuring compliance in areas such as legal, bookkeeping/accounting, and tax requires specialized knowledge and expertise. Non-compliance can lead to significant setbacks, loss of charitable status, or even penalties for organizational leadership. All organizations should, at minimum, have reliable and experienced professionals who can advise on questions related to work in these categories. Hiring experienced operations support to perform most or all of this work can further reduce the risk of costly missteps. A few examples of what could go wrong:

• Signing a large contract with a major supplier or customer without fully understanding the obligations and liabilities could have major financial and reputational consequences if commitments cannot be upheld.
• Misunderstanding accounting and bookkeeping requirements could mean that taxes are filed incorrectly, which could incur fines and risk losing the organization’s tax-exempt status.
• Inadvertently classifying an employee as a contractor due to misunderstanding relevant state-level wage and hour laws could lead to underpaying the employee and incurring fines on top of paying the owed wages.

Even workstreams that generally require less specialized expertise may be worth considering hiring operations support. While recruiting and event planning may not require the same technical expertise as providing tax and legal advice, a poorly run hiring round or failed event can still potentially have serious legal and reputational consequences, which an experienced operations support provider can help avoid.

Putting it all Together: Coordinated Expert Capacity

To this point, I’ve made the case that hiring operations support can free up organizational capacity and mitigate the risks of non-compliance. But this only works when the operations support provider - the expert capacity - has clear instructions, access to necessary information, and an understanding of the organization’s strategic vision. For a service provider hired to handle a single project or task, this requires the organization’s leadership to regularly communicate with the provider to ensure they have everything required to meet the organization’s needs, which can include facilitating the information flow of relevant context between internal staff and other external service providers, as well as between them and other service providers. The importance and difficulty of this information sharing and coordination increases with the more people and parties that become involved.

To this end, the additional benefits of coordinated expert capacity can be realized by working with an operations support service provider that offers multiple operations services working cooperatively. The provider may even offer fiscal sponsorship in addition to this operations support across a range of workstreams.

I define ‘coordinated expert capacity’ as when a service provider has visibility across a variety of interrelated operations workstreams and can, therefore, internally collaborate across workstreams to optimize workflow and provide better service. This model can replicate the efficiency of an in-house operations function and minimize the effort required to relay information across various parties. Additionally, a service provider that offers coordinated expert capacity is typically better placed to be a strategic partner on operations decisions, compared to a service provider focused on the details of a single workstream.

Potential Drawbacks of Fiscal Sponsorship and Operations Support: Cost and Control

The biggest disadvantages of fiscal sponsorship and operations support are the potentially high costs and reduced speed and flexibility in certain operational decisions.

The costs of fiscal sponsorship vary depending on the sponsor, but are typically charged as a percentage of income (i.e. grant funding) and are often 6-10%, though sometimes more.^[2] Fiscal sponsors that also offer operations support will have additional costs on top of this, potentially as an additional percent of income or other fixed or variable fees. Operations support providers that do not also offer fiscal sponsorship usually charge an hourly rate or a flat rate by week/month, depending on the service and provider quality and experience. These fees may seem high to a new organization on a small budget, though it still may ultimately be the most cost-effective way to access necessary expertise and skillsets. It is also important to remember that these costs account for the provider’s costs, overhead, and the flexibility of a short-term and/or part-time agreement.  

A second potential drawback is the potential lack of speed and flexibility on certain relevant operational decisions, especially in fiscal sponsorship arrangements. Fiscal sponsors typically require sponsees to follow specific governance policies and procedures in order to mitigate potential risks. Due to the interconnected legal structure of fiscal sponsors and sponsees, a fiscal sponsor bears ultimate responsibility for the assets, liabilities, and risks for each of its sponsees. As a result, fiscal sponsors are incentivized to move carefully and to be risk averse, as a significant issue with one sponsee (i.e. a major lawsuit) has the potential to negatively impact the fiscal sponsor and all other sponsees that the fiscal sponsor supports. This may mean that a fiscal sponsee may have specific limitations in terms of how they perform specific activities, including, but not limited to:

• spending funds,
• hiring employees and contractors,
• traveling and planning events, and
• when and how they ‘spin-off’ and become independent from their fiscal sponsor (this needs to be discussed and planned for well in advance).

Hiring an operations support provider without fiscal sponsorship tends to be less restrictive than a sponsor-sponsee relationship, though the provider may have its own policies and procedures that limit how or when they can perform work. 

It is critical to proactively communicate needs and ensure a detailed understanding of expectations before committing to a fiscal sponsorship or operations support agreement. If service becomes unsatisfactory, new needs arise, or the service provider fit is less than expected, it is important that these concerns are raised as soon as feasible. A reputable service provider should be able to explain where there may or may not be flexibility in their service model and collaboratively work toward a productive solution to any good faith concerns.

Conclusion

In this post, I have outlined some of the key benefits and drawbacks of fiscal sponsorship and operations support. Fiscal sponsorship can provide some instant initial infrastructure and significantly reduce the time required for a new organization to start doing object-level work. Operations support provides additional expert capacity through access to domain experts on a part-time, as-needed basis, which can be more effective, cost-efficient, and flexible than hiring full-time employees for a small organization. Comprehensive operations support across operations workstreams, especially when combined with fiscal sponsorship, can yield further benefits from coordinated expert capacity. Drawbacks include potentially high costs and (for fiscal sponsorship in particular) some degree of restrictions to organizational autonomy.

Due to the benefits and costs, fiscal sponsorship and operations support tend to be a better fit for newer and smaller organizations. Newer organizations generally benefit more from the instant infrastructure of fiscal sponsorship and may not be as concerned with the limits on autonomy in the short term. Smaller organizations often benefit most from operations support, where fractional professionals can provide a wide variety of expert capacity (or even coordinated expert capacity) in a way that’s more efficient than a full-time operations hire.

New organizations may choose to start off utilizing fiscal sponsorship and operations support services to get up to speed quickly and then eventually reduce their reliance on external support providers, once they create their own operations infrastructure and build the internal capacity and expertise to efficiently meet their operations needs.

Finding fiscal sponsorship or operations support

• Rethink Priorities (disclosure: my employer) is currently accepting Expressions of Interest for new projects for fiscal sponsorship and operations support (rolling basis)
• Pineapple Ops: Fiscal Sponsor Directory
• EASE: EA Services Directory
• Impact Ops: Our Services
• Anti Entropy: Services and Process

Additional reading 

• Impact Ops Article: Fiscal sponsorship, incubation, or ops support?
• Anti Entropy Portal Resource: Fiscal Sponsorship Resources
• National Network of Fiscal Sponsors: About Fiscal Sponsorship 
• National Council of Nonprofits: Fiscal Sponsorship for Nonprofits
• Charity Entrepreneurship’s book: How to Launch a High-Impact Nonprofit

This post was written in a personal capacity and does not express the views of my employer. Examples, resources, and readings listed are not intended to imply an endorsement. I have cited and included a few sources that I find helpful; please feel free to add further resources in the comments section. This post is not intended to include legal, financial, or tax advice - please consult a professional.

Thanks to Lara La Barbera, Joseph Lemien, Ben Stevenson, Matthew Fargo, Erich Grunewald, Chris Akin, Cristina Schmidt Ibáñez, and Maria De la Lama Laviada for their valuable feedback and input on this post.

1. ^{^}

   https://www.fiscalsponsors.org/about-fiscal-sponsorship

2. ^{^}

    https://resourceportal.antientropy.org/docs/fiscal-sponsorship