This post is part of a series designed to help you prepare to launch a high-impact startup.
Here, we focus on “spinning out” — which applies to projects that are already fiscally sponsored by a larger nonprofit.
What’s a fiscal sponsor?
A fiscal sponsor is a nonprofit organization that provides tax exemption status, and administrative services, to smaller charitable projects.
Fiscal sponsorship can be an option for individuals or groups who don’t want to establish their own legal entity, or for existing legal entities without tax-exempt status.
The fiscal sponsor maintains control and oversight of any grants or donations received by the sponsored project; however, it also shoulders all of the legal and regulatory burden for the sponsored project. This means that staff of the smaller project technically become employees of the fiscal sponsor. It also means that any data or IP produced by the smaller project legally belongs to the sponsor. The smaller project is bound by the sponsor’s policies, and its activities are overseen by the sponsor’s board.
In return for these administrative services, the sponsored project pays a fee to its sponsor. This fee is typically between 10–20% of the project’s income, but can be higher. Some fiscal sponsors offer additional operational support above the basic financial and administrative support, and adjust their fees accordingly. You can read more about fiscal sponsorship here.
A fiscal sponsor may consider sponsoring your project if your activities align with its mission. This model has been offered by Effective Ventures, Players Philanthropy Fund, Rethink Priorities, and more.
Choosing to exit a fiscal sponsorship
You may decide to exit your fiscal sponsor for one of several reasons:
Seeking another sponsor
If you’re considering another sponsor, bear in mind the pros and cons of fiscal sponsorship:
Pros |
✅ Having a fiscal sponsor can attract potential donors, as donated funds or grants will be tax-deductible for the donor.
✅ Your project appears more legitimate and professional due to the additional sponsorship and support. Donors and people working with your organization can be more confident you have proper oversight and compliance. ✅ Depending on the sponsorship model, fiscal sponsors often take care of the administrative and operational overhead and burden. For example, fiscal sponsors often manage payroll and administrative tasks. |
Cons |
❌ The fiscal sponsor has final discretion on how to distribute and manage your funds. All funds go to and belong to the sponsoring organization.
❌ You will need to relinquish control of the project to the fiscal sponsor if you’re under a comprehensive model. ❌ If there’s not a strong enough connection between the mission or values of the sponsor and its projects, the IRS, might view the relationship as a mere “conduit relationship.” A conduit relationship is one where the flow of money may be obscured or structured to achieve a specific tax outcome, which can result in penalties. |
If you’ve decided to seek another fiscal sponsor, check out this directory of fiscal sponsors.
Establishing an entity of your own
If you’re planning to set up an entity after leaving a fiscal sponsor, you must:
- Set and agree on a termination date
- Agree on a deadline to transfer the assets
- Obtain a copy of your project’s accounting history
- Terminate any employment relationships between the fiscal sponsor and any project staff
- Set up new insurance policies to cover the organization and its staff (see ‣ for more information)
Leaving a fiscal sponsorship to establish an entity of your own is often called “spinning out.”
Winding down the activities of your project
If your project intends to either:
- wind down its activities; or
- continue its activities outside of a charitable organization
there should be an agreement between your project and its sponsor that any funds left over be transferred to another charitable organization that has similar projects. (Funds can only be taken from a fiscal sponsorship for another charitable purpose.)
Once you’ve decided to exit your fiscal sponsorship, you don’t need to exit right away.
In fact, if you’re establishing an entity of your own, it’ll be useful to begin working on subsequent tasks before your exit is complete. These tasks might include talking with prospective board members, drafting governing documents, and considering your fundraising strategy. We’ll cover these in subsequent posts.
But you will want to devise a plan at this stage.
Planning the spin-out
The key goal when planning a spin-out is to make sure the new entity is operational (registered, has a bank account, etc.) so that the project can transition between entities without any missteps in day-to-day operations.
There are four high-level stages to consider for your spin-out:
- Understand the timing: When is the target spin out date?
- Understand the exit terms: What are the key dates? What support, if any, will you continue to receive after your exit?
- Transfer funds and assets: How will funds allocated to your project be used when its sponsorship ends? Which assets should be transferred from the sponsor, should there be any remaining?
- Migrate systems: Which systems and infrastructure should you use in your new entity?
The list below breaks each stage down into a series of steps. This can form the basis of your “tracker” for managing the spin-out.
1. Understand the timing
Determine target spin-out date. This would usually be dictated by how long it will take to get the new entity up and running, or how long it will take you to spend down your remaining funds (if the fiscal sponsor is unwilling to make an exit grant to the new entity).
2. Understand the exit terms
Read your employment contract. Your employment contract may specify the end date of your employment, and thus the date after which your project will be legally separate from your fiscal sponsor. (When exiting a fiscal sponsorship, it can be common to have a supplementary exit agreement in place — specifying terms and conditions around termination, project separation, and data transfer. However, a separate exit agreement isn’t essential. As a fiscally-sponsored project, you’re legally employed by the sponsor — so, a fixed term employment contract (specifying an end date) is sufficient for the legal separation.)
3. Transfer funds and assets
| Request your balance sheet | The balance will likely be a tentative balance if you are still fiscally sponsored and a final balance will only be available after spin-out. |
| Initiate transfer | This will likely happen after the spin out is complete and the fiscal sponsor has reconciled any final payments. Some fiscal sponsors will only grant to other 501(c)(3)s. So, you can either wait until your new entity has 501(c)(3) status or you can apply for Expenditure Responsibility in order to complete the transfer. |
| Determine assets to transfer | Assets might include laptops, monitors, and other equipment that’s on the fiscal sponsor’s asset register |
| Transfer employment contracts | In the US, this is usually done by project team members formally resigning with notice given for the target spin out date. The new entity will issue contracts to the team members, with the first day being the day after the target spin out date from the fiscal sponsor. |
| Transfer data | Transferring personal data may require that you inform users that there data is being transferred to the new entity. It may be sensible to get legal advice on transferring data, especially if your project makes use of sensitive categories of data (like ethnicity or health). |
| Transfer IP & intangible assets | This may involve a valuation of IP, conducted by an external agency. |
| Transfer vendor contracts | Some vendors allow you to easily shift the contract over to the new entity and update the payment details. Others may require you to cancel the contract you have with them and set up a new contract between them and the new entity. So, pull together a list of all vendors you have contracts with and systematically go through and inform each vendor and seek to transfer the contracts over to the new entity. |
| Transfer grants | If the fiscal sponsor is willing to transfer the remaining balance you hold on hand with them to the new entity, they will likely want to do so via an exit grant. There should be a grant agreement that accompanies this grant. |
4. Migrate systems
| Determine systems to migrate | Consider which systems you used — and enjoyed using! — while your project was sponsored.
Your core systems might include, for example:
|
| Migrate accounts where necessary | For many of these systems, it’s sufficient to simply create a new workspace from scratch.
However, for some systems with significant historical data, you may want to migrate the accounts and their data into the new workspace. An example of this is Google Workspace, where you may want to preserve historic email exchanges post spin–out. You can use Google’s data migration tool for this (in combination with email forwarding from the old domain to the new domain, to ensure nothing gets missed). |
You don’t need to complete all steps before moving on to the stage in launching your startup — you just need to have a plan in place for them.
Stay tuned for our next post: Build a board of directors.