[Question] Fiscal sponsorship, ops support, or incubation?

[Harry Luk]

After about a month — during which we finished the productivity system, the Founder’s agreement, and the funding proposal — we have reached what we think is our first bottleneck of co-founding an AI Safety nonprofit.

As we are both new to starting a nonprofit and unfortunately not (yet?) part of an incubator, we are not sure what’s the best method to get it off the ground.

Thus far, we have been looking mostly at fiscal sponsorships based on CE’s handbook. However, a fellow EA recommended impact-ops.org, which is a very cool service that can possibly help with entity forming and other services.

This was where we learned that the best option (fiscal sponsorship, ops support, or incubation) will depend on one’s circumstances:

• Timing: If you’re optimizing for setup time, an ops support provider may be your best bet. You can have your entity registered within a couple of weeks, and you don’t need to align your plans with a cohort of other founders.

• Cost: If you’re optimizing for cost, incubation may be the right choice. Although there are fiscal sponsors and operational support providers who can offer services for free, this approach is much more common in the incubation model.

• Autonomy: If you’re optimizing for autonomy, an ops support provider is the way to go. You won’t be bound by the policies, processes, or reputation of a parent entity or its projects.

• Exposure to other founders: An incubator is the best way to meet other founders and cross-pollinate ideas and strategies. Not only will you learn from others during the incubation program, but you’re also likely to build some long-term relationships that can pay dividends in the future.

• Long-term integration: If you’re looking for deep and long-term integration with an existing legal entity, consider fiscal sponsorship. A long relationship with an aligned parent entity can also expose you to a network of relevant people and projects.

Questions we wanted to ask the EA Forum:

1. From your experience, are there other considerations we should be thinking about?

2. Do we need a legal entity established before starting fundraising?

Thank you very much in advance for your help! It’s much appreciated :)

[Cristina Schmidt Ibáñez]

Hey! (full disclosure: I work within the Special Projects team at Rethink Priorities which also provides fiscal sponsorship services).

A couple of quick notes from me:

• There are different models of fiscal sponsorship. I can recommend this overview from AntiEntropy and this to learn more about that. Different sponsors offer different models (depending on their infrastructure and risk appetite) although A and C are the most utilized and established.

• Another thing that your question seems to imply is that these options—depending on how you define them - are mutually exclusive (which they are not) e.g. you can get fiscal sponsorship for tax-exemption and basic financial compliance but also “external” ops support. There are also ways to meaningfully combine incubation with fiscal sponsorship (which unfortunately I won’t be able to lay out here today).

• Some funders require a project to have tax-exempt status (either via their own 501(c)3 or because they are fiscally sponsored by another 501(c)3). In those cases you’ll need fiscal sponsorship (beyond ops support) to receive a grant.

[Harry Luk]

Thank you so much Cristina! Thank you for your insights, especially the point about the three options not being mutually exclusive.

I definitely didn’t think that you could combine incubation with fiscal sponsorship.

Having read this, does this mean it’s worthwhile to apply to as many incubators and/​or fiscal sponsorships as we can?

(It does sound like we can do “external” ops support no matter what path we take.)

Thank you again for your help!

[Harry Luk]

Got private message feedback

if you sign up with a fiscal sponsor you either sign up as an individual or as an entity. if you sign up as an individual, you’re also personally liable if something goes wrong.

Natural follow-up question becomes: “is setting up an entity is the rate determining step (bottleneck) after all?”

The answer to this is provided in the articles referenced by Cristina Schmidt Ibáñez (https://​​forum.effectivealtruism.org/​​posts/​​zzcWFPHCuNEYCw4kJ/​​fiscal-sponsorship-ops-support-or-incubation?commentId=uZaukmD4DeXBXPD5z)

In short:

Under model A

The project becomes an internal fiscally sponsored program, not a separate entity.

Under model C

The project is considered a separate entity.

[DC]

Have you considered starting a public benefit corporation instead of a nonprofit?

[Harry Luk]

Thank you for your comment! No, we have not thought of this, will do a digging on what this is right now.

[Robi Rahman]

This doesn’t answer your question, but: I’ve heard several people opine that “fiscal sponsorship” is a really bad name for what it entails. I work at Epoch, which is a fiscal sponsee of Rethink Priorities (and yes, RP uses the word “sponsee” for us and all their sponsees). My understanding is that we (Epoch) pay some kind of fee to RP (annual? maybe a percentage of our budget? idk), and in return, RP’s HR people handle our HR stuff and some of their ops people spend some time doing ops work for us. This is almost the complete opposite of being “fiscally sponsored” in the sense of being sponsored by and receiving money from the sponsor.

h/​t @SarahPomeranz

[merilalama]

Hey Robi! Yeah, I agree fiscal sponsorship can be a misleading term, since “sponsor” suggests someone who provides money. In the case of fiscal sponsorship, what the sponsor provides is tax-exempt status. I’d be somewhat reticent to use another term because this one is widely used in the nonprofit world. From Wikipedia:

Fiscal sponsorship refers to the practice of non-profit organizations offering their legal and tax-exempt status to groups (...). It typically involves a fee-based contractual arrangement between a project and an established non-profit.

I do think the EA community could use a bit more clarity around what fiscal sponsorship is, though. Maybe us at RP will write some posts about this soon.

I should note also that fiscal sponsors often don’t provide operational support, as RP does for Epoch and other fiscally sponsored projects. So that’s not what the term “fiscal sponsorship” primarily refers to. Outside of EA, I think it’s more commonly just a way for non-profit projects to accept tax-exempt donations.

[Harry Luk]

Thank you for your comment.

Yes, just want to confirm the costs involved:

Not all sponsors charge a fee, but it’s typical to be charged between 5-10% of your annual budget

CE’s handbook page 350 estimates costs as well:

Fiscal sponsors charge fees, ranging anywhere from 2-15% either of expenditures or reveneues.

Couple reasons why the cost could be worth it is:

You avoid the hassle of setting up an entity and building an operations function

Your project can become associated with a very reputable entity, which signals its potential to the community