A nonprofit is typically established by an individual or a group of individuals who see a need and have a vision and passion for meeting that need. For well over a century, this passion and drive to fulfill a societal need has created nonprofit colleges, hospitals, museums, and a myriad of social service organizations. Today, the nonprofit sector has been expanding rapidly, expanding by almost 25% in the ten years prior to 2011, faster than either the corporate or government sectors1. In addition, 60% of nonprofits have budgets of $50,000 or less2, indicating that they are either run by a robust team of volunteers or have very limited resources. Given this climate, there may be opportunities for nonprofit organizations to work more efficiently by collaborating with others. This topic of the month will focus on how nonprofits can collaborate by creating and supporting fiscal sponsorships as well as back office functions.
Spectrum of Collaborations
As the nonprofit market grows, so does the competition for resources. In addition to competing for donated funds, nonprofits are also increasingly competing for staff, volunteers, and even program participants or customers. When organizations share a similar mission, there are a number of ways that they can collaborate with each other to decrease the amount of resources used by each organization. Collaboration runs from informal, such as inviting another nonprofit to create a special event with you, to formal, wherein two organizations would merge. The spectrum in the exhibit below.
I think 2016 will be the year that the nonprofit world enters the sharing/collaboration economy. Organizations will begin to tap into existing, underutilized resources. This can include the sharing of interns, employees and office/event space, and the formation of umbrella organizations guiding and funding groups of charities in related fields. I believe (and hope!) we will see some significant creativity in this regard.
—Dave Linn, Chief Operating Officer
The Generosity Series
The less formal collaborations can be used to strengthen the infrastructure and administrative processes within both nonprofits. Typically the result of proximity and mutual need, nonprofits come together to join in mutual beneficial informal arrangements. While collaborations are usually most effective when the missions or the collaborating organizations are aligned, an informal collaboration is a good way to engage nonprofits that are aligned around a specific issue or demographic, such as serving a specific neighborhood or working with youth.
Examples of these collaborations include:
- Hosting events where two or more nonprofits provide a different service but both appeal to the same customer/need base. For example, at the beginning of the school year, a variety of nonprofit organizations that serve youth can host a Fall festival and invite the students and their parents to learn about the different activities that each organization offers. This can include nonprofits with a focus on serving youth through sports, arts, cultural opportunities, as well as traditional after-school or homework help programs. All organizations could split any expenses, and together they could likely draw more parents and potential program participants than if they hosted an event on their own.
- Sharing office space and supplies to cut down on administrative costs.
- Partnering with organizations that provide complementary programs. For example, an after-school program that meet from 3:00 – 4:00 could partner with a youth sports program that meets across the street from 4:00 – 6:00, thereby providing safe and engaging activities for children whose parents work longer hours.
While these types of collaborations are more informal in nature, it is a good idea to have a simple written agreement in place that stipulates the form of partnership. For example, if four nonprofits are hosting a Fall Festival, a short agreement should be developed that outlines what each nonprofit will contribute (both financially and in the form of programming), guidelines of when nonprofits are expected to help set up and take down decorations and displays, and how and when any expenses will be paid.
As outlined earlier, over 60 percent of nonprofits have annual revenue of $50,000 a year or less. At the same time, an unprecedented number of nonprofits are being created each year. Because nonprofits are often started because someone has a passion to fulfill a need, Cathedral often recommends that a person who wants to start a nonprofit begin by seeking a fiscal agent.
In short, a fiscal agent is an established 501(c)(3) organization that accepts on behalf of another organization that is in the process of seeking 501(c)(3) status. The process of starting a nonprofit involves a number of applications and fees at both the state and federal level.
One of the main appeals of a nonprofit is its ability to solicit funds from donors who, in many circumstances, can then claim a tax deduction on their donation. However, it can take up to six months for a nonprofit to receive 501(c)(3) status from the Federal government, and a nonprofit cannot legally solicit donations and provide a receipt that a donor could use to claim a tax deduction until their 501(c)(3) status has been approved.
During this waiting period, another nonprofit can accept donations on behalf of the start-up nonprofit, thus establishing a fiscal agent relationship. The fiscal agent nonprofit accepts funds for the start-up program, deposits donations into a separate bank account, provides receipts for donors that they can use for any appropriate tax deductions, and provides the start-up nonprofit with reports of donations.
If you are a new nonprofit, there are a few practical issues to consider if you choose to find a fiscal agent.
First, the fiscal agent should ideally have a mission and corresponding values that are closely aligned to the mission and values of your organization. Donors need to understand the fiscal agent relationship when they give to your nonprofit, and having a close alignment between the two organizations makes it easier for donors to inherently understand the connection. For example, if you were a pre-school program and asked a senior living center to be your fiscal agent, donors to your pre-school program may have questions about why you are partnering with an organization that, at face level, has nothing in common with your program.
Second, because each organization has specific responsibilities, the fiscal agent should establish a contract that specifies exactly what specific services the sponsoring organization will provide and what the start-up organization will provide. At a minimum, the fiscal agent needs to accept donations of cash/checks, deposit them into a separate bank account, promptly provide receipts to donors, and provide a report to the start-up. For its part, the start-up must commit to solicit funds only for the purposes stated in its mission.
Third, because the fiscal agent is providing a real service to the start-up, the start-up should consider paying a nominal fee to the fiscal agent. It is important to realize that the receipt and deposit of funds as well as the receipting of donors and generation of reports takes time and the organization’s resources. While some fiscal agents have the capacity to absorb these costs and do not charge start-up nonprofits, most fiscal agents will charge either a flat fee (e.g. $50 per month) or a small percentage of the funds that are donated, with a cap on the total amount (e.g. 1% of all funds raised, up to $100 per donation).
Fourth, as a start-up nonprofit, it is important to realize that not every nonprofit is willing or able to be a fiscal agent. In fact, nonprofits that have been a fiscal agent before are typically better candidates for your fiscal agency, as they most likely have already developed a process for accepting donations on behalf of other organizations.
If you are start-up that does not have its 501(c)(3) status and think that a fiscal agent might be a good solution for you, there are two main resources for finding a fiscal agent. First, review The Fiscal Sponsor Directory. This webpage is a search engine for fiscal sponsors in 33 states while listing eligibility requirements for entering into a fiscal sponsorship.
Second, if your nonprofit has an emphasis on the arts, Fractured Atlas may be a good option.
They provide a number of resources, including serving as the fiscal agent of approved organizations.
Management Services Organization
If you are an organization that has already achieved its 501(c)(3) status but are seeking to find ways to become more efficient and streamline administrative systems, a Management Service Organization (MSO) may be a good opportunity. An MSO is a separate entity that provides back-office functions to multiple organizations. For example, a senior living center has a number of administrative functions, including billing for services, applying for and receiving funds from Social Security and insurance companies, and running payroll. It may be beneficial for the senior living center to work together with one or two other senior centers in the community to share back-office functions.
As anyone who has tried to outsource payroll for a three-person office knows, it is difficult to negotiate with vendors and service providers when you are a small organization. By joining forces with other nonprofits, the group now has the ability to negotiate better pricing with service providers, such as payroll, accounting, and bookkeeping services. In addition, an MSO allows a nonprofit to tap into an existing system of services that are likely to be more cost-effective and efficient than their existing services.
For example, Cathedral worked with three healthcare facilities that each had separate billing and insurance reimbursement departments. Bringing these three organizations together and outsourcing the billing and insurance reimbursement to an MSO resulted in the following:
- The organizations were able to redeploy several administrative staff into program positions.
- The MSO turned around insurance claims more quickly, resulting in a more dependable cash flow and fewer long-term liabilities.
- The MSO was able to negotiate lower costs for payroll processing, and those savings were passed on to the nonprofit organizations.
From a logistical standpoint, an MSO can be an entity that is created by several nonprofit organizations, or it can be an existing entity that provides the needed services to nonprofits.
Because this an MSO involves several organizations and fees for service, Cathedral recommends that the participating organizations consult an attorney to develop a contract for services.
Nonprofits are facing increasing pressure from funders and stakeholders to operate more efficiently. Collaboration, whether it is informal or formal, can be an effective way for organizations to share access to resources, technical expertise, or even program participants.
1 Roeger, K.L., Blackwood, A.S., & Pettijohn, S.L. (2012). The nonprofit almanac. [e-book]. Retrieved from http://nccsdataweb.urban.org/NCCS/extracts/nonprofitalmanacflyerpdf.pdf
Articles for Further Reading:
- The Foundation Center hosts an excellent library of articles, sample agreements and other resources that pertain to various forms of collaboration: http://foundationcenter.org/gainknowledge/collaboration/
- The Center for Nonprofit Excellence also lists several resources, including templates for collaborative agreements. http://www.thecne.org
- The Nonprofit Finance Fund® (NFF®) offers a structured process to assess and manage collaborations that help two or more nonprofit organizations work together to improve quality of services, strengthen financial stability, upgrade systems, save money, and expand staff opportunities: http://nonprofitfinancefund.org
Kimberly Reeve is a former Managing Director, and Jessie Schnoebelen is a formal Intern in the New York Office. This article was written for our Topic of the Month as part of our General Executive Counsel program. For more information, please contact us at firstname.lastname@example.org.