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What to Expect When You’re Expecting...to Separate:

The Stages of Fiscal Sponsorship Separation

Fiscal Sponsorship Separation Series, Part 2

Welcome to the second post in Schulman Consulting’s “Separation Series” focused on the experience of separating and all that goes into it. We’ve created this series because while there is lots of information available on the legal definitions of fiscal sponsorship and how it technically works, there is not a lot available about specific issues and experiences that fiscally-sponsored projects have and how to deal with them.

Now that we’ve gone over some of the key causes of separation, this post will provide an overview of what’s actually involved in the process. Of course every project’s experience is somewhat unique, but this should at least get you started. And if you want a free PDF checklist of the information covered in this post, click the green button below.

With an undertaking this massive in scale, with so many moving parts and variables, it’s important to start at a high level before diving into the details. So, before getting too deep, let’s talk about the four basic stages of the separation process. They are:

  1. Requesting Tax Exemption
  2. Getting Ready
  3. Your IRS Letter Arrives -- now what?
  4. Separation...and beyond

Now let’s look at the major activities happening during each of these stages.

Stage 1: Requesting Tax Exemption

This might be obvious, but before you can move forward in this process, you’ll need to establish your organization as a corporation and then submit all of your 501(c)(3) paperwork to the IRS -- this will start the first clock in this process and signal to any vendors/service providers you speak to in Stage 2 and beyond that you’re serious about moving forward.

Slightly less obvious might be that before you put the wheels in motion on your paperwork, you should talk to your fiscal sponsor and let them know what you’re planning to do. This may not be right in all cases so use your best judgement here, but for most, it’s important to do this early -- your fiscal sponsor may end up being an extremely helpful resource through this process!

Your next question at this point should be, “Who can/should I work with to take me through the actual process of applying for my 501(c)(3) status?”

There are a number of answers here, but all of them involve attorneys. My first recommendation would be to find a large, local law firm that will carry out your applications (both state and federal) on a pro bono basis.

If that’s not an option, you may to find a local attorney that specializes in nonprofit law, or your last option would be to search “501(c)(3) application” on your favorite search engine. That will give you a list of options -- or you can even try LegalZoom. You’ll have to pay for this work, but if that’s the only alternative, bite the bullet.

UNDER NO CIRCUMSTANCES should you allow yourself, your team, a volunteer or anyone else who’s not an attorney undertake this work for your organization. It’s just not worth it. I know us nonprofit folk are usually inclined to take everything on that we can ourselves, but in this case I highly recommend against it.

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Stage 2: Getting Ready

Now that you paperwork is in, or at least in process, it’s time to make some decisions and get to work.

First, you need to decide how you’re going to handle all of the administrative functions that your fiscal sponsor has been doing. This list likely includes some combination of: finance/accounting/payroll, human resources, IT and legal...and probably others.

You may decide outsource some of them and keep the others in-house, outsource all of them or keep them all in-house. It’s up to you and will likely be driven by your resources and staff experience. This is another place (like your IRS paperwork) where I strongly recommend that you hire professionals. It’s just not worth the risk to do your accounting and legal, especially.

Next, it’s time to locate your vendors and service providers. The overall list is too long to list here, but you’ll want to start with whatever you’ve decided to outsource from the list above and then go from there. Of course you’ll also need to get corporate insurance and a provider of employee benefits. And that’s just the start…

Needless to say, this stage can be very time-consuming for whoever is involved in this process at your organization. One way to get started is download my free Separation Checklist -- and if you’re looking for more help, Schulman Consulting routinely helps clients navigate this process, so give us a shout.)

* * * *

Stage 3: Your IRS Letter Arrives -- now what?

Great news -- the IRS has approved your application and you’re now a tax exempt nonprofit organization. So what comes next?

First, there likely one or more state/local government agencies you need to register with so your organization will be recognized as an employer in the places where you have employees. That’s a big step and will pave the way for you to set up all of the services that you scoped out in Stage 2.

That’s right -- it’s time to start signing up with all of those vendors and getting all of these new systems and processes up and running.

It helps here to have a target separation date that everyone is working toward and some money in your new bank account to start paying for all of these services.

Another major part of this stage is reviewing all of your contracts, waivers and other legal documents with an attorney, especially if your fiscal sponsor signed all of your contracts and was the responsible party on any other forms you’ve been using.

* * * *

Stage 4: Separation...and beyond

Now the day has finally arrived. You’ve done all your preparation, communicated with your fiscal sponsor and are ready to ‘flip the switch.’

During this stage there are still a lot of balls in the air -- the biggest of which is making your employees are now your employees. If they were officially employees of your fiscal sponsor, it’s time to make sure you officially hire them and set them up in your systems.

Depending on the setup with your fiscal sponsor, another major To Do in this stage is to migrate all of your web- and cloud-related accounts from those managed by your fiscal sponsor -- and remove references to them (and their EIN) them from every corner of your organization. Keep in mind: It might take a few months before you totally remove them from every last document, web page and piece of marketing collateral -- but don’t stress about that too much.

Finally, as you’ve probably realized even just by reading this overview, there are lots of places where things can go awry in this process. One way to smooth things out is to get some help.

Another way to deal with this is to just assume that things will go wrong and be prepared to deal with them: Give yourself ample time, pad your deadlines, take things as they come and try not to get too stressed.

* * * *

So there you have it -- the 4 basic stages of the separation process. After reading this, you now have a very good idea of what’s involved and what you should be thinking about at every step of the way. If you’d like an easy to digest checklist version of everything we’ve just gone over, click here to download a free PDF.

If you’re a current or former leader of a fiscally-sponsored project that separated, did your experience differ from the stages I’ve outlined? What other issues did you encounter? If you’re planning to separate or thinking about separating, what parts of this process scare you the most? Please share your experiences by leaving a comment below.

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Next Up: Now that we’ve talked about the reasons why projects separate and looked at the steps in the separation process, let’s dive into some of the hard costs of becoming an independent 501(c)(3). Click here for next post in this series.

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