A fiscal sponsorship relationship may, at some point, come to an end. Whether the project leaders have found a new sponsor, created a new nonprofit entity with its own exempt status under 501(c)(3) of the Internal Revenue Code, or decided to move on in order to focus on other ventures, the parties should properly terminate their fiscal sponsorship agreement and transfer the project’s assets and liabilities, if applicable.
Generally, having a fiscal sponsorship exit and transfer or termination agreement is a good practice to adopt. Typically, it should be an agreement signed by the sponsor, the successor, as well as the advisory committee of the project being transferred. In practice, the transfer of assets is a grant that the sponsor should ensure is made consistent with its 501(c)(3) purposes and with reasonable care consistent with the termination provisions of its fiscal sponsorship agreement. This is also true when the project is not being transferred, but rather is ending operations and the remaining assets are being granted out in furtherance of the project purposes by the sponsor to another organization.
The parties involved in a fiscal sponsorship exit and transfer of assets may want to consider the following issues:
Vetting the Successor. Prior to transferring charitable assets to a successor fiscal sponsor, the current sponsor should properly vet the contemplated successor sponsor and reflect such vetting in the exit and transfer agreement. For example, the current sponsor may want to check the IRS database to make sure that the successor sponsor is currently recognized by the IRS as exempt under 501(c)(3) and has not had such status revoked (e.g., for failure to file its annual returns). Current sponsors should ask for the successor’s governing documents to ensure that the project will fit squarely within the successor’s exempt purposes. The exit and transfer agreement might require the successor to represent and warrant that it is in good standing under the laws of its state of incorporation, registered and qualified to transact business in each jurisdiction in which it and/or the project operates, and qualified as exempt under federal tax laws.
Transfer. An exit and transfer agreement should articulate what exactly is being transferred from the current sponsor to the successor sponsor. For comprehensive fiscal sponsorship arrangements, in addition to cash assets, the agreement should describe other assets to be transferred such as equipment, furniture, materials, supplies, mailing lists, and other intellectual property associated with the project. Leases and other contracts to be assigned to, and assumed by, the successor should also be included. Note that some contracts and leases may prohibit or restrict assignments, in which case there may be some work to do to negotiate and amend or terminate those agreements. If notice is required to be given to another party, the sponsor should make sure that is done appropriately to avoid the possibility of a breach of contract.
Liabilities. In a comprehensive (Model A) fiscal sponsorship relationship, the sponsor may want to assign to the successor fiscal sponsor, and have the successor assume, any liabilities incurred in connection with the operation of the project before or after the transfer. However, the successor fiscal sponsor may only want to assume those liabilities it knows of. Accordingly, the current and successor fiscal sponsors may need to negotiate this matter. On the one hand, it makes sense that the project’s liabilities should follow where the assets are transferred, since project assets should be used to pay for project liabilities. On the other hand, a successor fiscal sponsor may not want to take on liabilities that may be greater than the amount of project assets, particularly if the liabilities are still unknown. For example, a person who suffered a personal injury from a project activity may not come forward to report or file a lawsuit until later, and such liability may be unknown to the parties. A possible compromise may be for the successor fiscal sponsor to accept all liabilities incurred in connection with operation of the project before the transfer, but only up to the value of the project assets transferred to the fiscal sponsor pursuant to the exit and transfer agreement.
Holding Back Assets. In some cases, a sponsor may want to determine whether it will hold back any project assets for project-related expenses not previously identified. This may include unknown liabilities, such as legal bills or other invoices that may be sent to the sponsor after the project has been transferred. If there is a holdback, the assets are generally held for a period of time (e.g., three months) before such assets are transferred to the successor.