Hunton Law

Legal Counsel for Nonprofits, Foundations & Social Enterprises

Legal Counsel for Nonprofits, Foundations & Social Enterprises

Fiscal Sponsorship

Fiscal sponsorship can be an ideal arrangement in which an established nonprofit organization (the fiscal sponsor) provides its Section 501(c)(3) tax-exempt and legal status to a project that furthers the fiscal sponsor’s mission.  For detailed descriptions of the most common fiscal sponsorship arrangements and best practices, see Fiscal Sponsorship and National Network of Fiscal Sponsors.

Fiscal sponsorship (“FS”) arrangements are of limited duration.  What happens when the relationship ends, the project work terminates, or some other transition occurs? 

If the FS relationship is set forth in a written agreement, the agreement will typically contain provisions addressing what occurs upon termination of the relationship.  Circumstances may arise when it is necessary to end or transition the relationship.  If these circumstances are not addressed in the written agreement, the fiscal sponsor staff and project leaders must discuss the timing, steps and procedures for separating or terminating the project. 

The following is a list of common circumstances in which a FS arrangement terminates:

  • The project establishes a relationship with a new fiscal sponsor and transitions the project work and any fund balance from the previous fiscal sponsor to the new fiscal sponsor.
  • The project work comes to an end, and there is no further need to operate in a FS arrangement.  If there are any funds remaining, the fiscal sponsor will either return the funds to the donors or grant the funds to an eligible charitable recipient.
  • The project has gained enough scale, traction, and financial viability to establish a separate entity and obtain tax exemption on its own. 
  • The fiscal sponsor terminates the relationship, in response to the project having violated certain terms of the FS agreement, or the project having been inactive for a certain period of time.
  • The project merges with another 501(c)(3) entity, and any remaining project funds are transferred to the new entity.

The increased use of FS to incubate new charitable endeavors has attracted scrutiny by government regulators of charitable organizations.  Structured correctly, FS arrangements hold exciting potential to create large-scale social good by incubating and developing legitimate social enterprise activities. 

Impact Law Forum: Human-Centered Design and the Law

Impact Law Forum’s September 26th meeting featured Sean Hewens, Knowledge Manager + In-House Counsel at IDEO.org, a nonprofit design consultancy using human-centered design to tackle poverty related challenges around the world.

Building off of his previous ILF talk in April 2013, Sean led a discussion and brainstorming session to identify opportunity areas to integrate human-centered design into the legal profession.  At its core, the human-centered design process is based upon the fundamental belief that gaining a deep understanding of the needs, hopes, and aspirations of potential customers and the lives they live yields incredible inspiration for new solutions (IDEO.org).  See my April post for more about HCD principles and applications to social and legal challenges. 

After presenting HCD principles and initial thoughts on making the legal profession more human-centered, Sean led the group through a design challenge called “Redesigning the Law”.  How might we as lawyers use the human-centered design process to provide better legal services to our social sector clients?   How might we uncover opportunities for innovation and design in the legal profession?  How might we imagine new solutions to improve the legal profession?

Impact Law Forum is deeply grateful for Sean’s leadership of two ILF meetings this year.  He believes in the important work of spreading human-centered design throughout the social sector, particularly at the intersection of the legal and social sectors.  We appreciate Sean's commitment and enthusiasm towards building the infrastructure for social change, tackling poverty related challenges, and improving the legal profession.

For a more visual description of the discussion and brainstorm, see Margaret Hagan's sketchnote on the Open Law Lab blog. 

Crowdfunding: Legal Aspects of Alternative Finance

Impact Law Forum’s August 21st meeting featured attorney Natalia Thurston of Social Venture Law, who presented on Crowdfunding: Legal Aspects of Alternative Finance

Crowdfunding is rapidly growing as a new source of capital aimed at funding micro-enterprise.  A major reason for crowdfunding’s growth is the 2012 passage of the Jumpstart Our Business Startups Act (“JOBS Act”), federal legislation intended to increase the flow of capital to U.S. small businesses by easing securities regulations.  It remains to be seen whether the law will benefit the startup and crowdfunding communities, or whether it will create new regulatory burdens, inefficiencies, and confusion in the marketplace.   

Natalia provided an overview of several types of alternative investment vehicles, including rewards-based (e.g., Kickstarter, Indiegogo), peer-to-peer lending (e.g, Lending Club, Prosper), direct public offerings (e.g., Farm Fresh to You, People’s Community Market), and self-directed individual retirement accounts.  An example of a direct public offering through equity crowdfunding is Mosaic, which connects investors to solar projects via an online platform.

Natalia then discussed the novel legal issues raised by equity crowdfunding, including investor accreditation and suitability requirements, risks to investors, and fiduciary duties of online platforms acting as intermediaries in light of the SEC’s lift of its ban on general solicitation in July 2013.  With several key SEC regulations still pending, the legal rules, reporting, and standards of equity crowdfunding remain uncertain.  Entrepreneurs, investors, and attorneys are awaiting further regulations from the SEC, which are expected later this year.  For information and updates on crowdfunding, visit Crowd Fund Beat.

The slides from Natalia’s presentation are available here.

The Past and Future of Social Entrepreneurship

Stanford Social Innovation Review hosted a free webinar on June 11, 2013 on “The Past and Future of Social Entrepreneurship”.  Four panelists provided a global perspective on the successes and challenges of social entrepreneurship.  Eric Nee moderated the panel, which included: Roger Martin, Dean of the University of Toronto’s Rotman School of Management; Leticia M. Jáuregui Casanueva, Founder and Executive Director, Crea Comunidades de Emprendedores Sociales; Soraya Salti, President and CEO of Middle East/North Africa for Junior Achievement Worldwide, INJAZ Al-Arab; Johanna Mair, Academic Editor, Stanford Social Innovation Review and Professor of Organization, Management and Leadership, Hertie School of Governance.  I highlight some of the discussion topics in this post.

What impact has social entrepreneurship had on the world over the past 30 years? 

The panelists noted two major areas of impact.  Social entrepreneurship has become (i) a compelling tool for change and (ii) an appealing field of practice.  As a tool for change, it has demonstrated an ability to make progress on some of the most intractable social, environmental, and economic justice problems around the globe.  As a field of practice, social entrepreneurship has a professional identity, formalized programs in educational institutions, and ability to attract talent from a broad cross-section of disciplines and backgrounds.

Do we know or agree on what a social entrepreneur is?

In past years, the term ‘social entrepreneur’ was not widely used or defined.  There is now a greater understanding of what the term means and what its value proposition is.  More professionals today identify as a social entrepreneur.  Having a commonly recognized term to label this work helps the social enterprise movement evolve beyond the traditional categories of “nonprofit” or “for-profit”.

Still, social entrepreneurship can mean different things to different people in different contexts.  The panelists agreed that this is a good thing.  In some situations, however, it is important to define the term explicitly, so that there is shared understanding to achieve a goal.  For example, in advocating for legislation to create new legal forms to support social enterprise, it would be important to distinguish social enterprise from other existing legal forms, such as cooperatives or nonprofit corporations, in order to articular the need for new legislation. 

How is social entrepreneurship different from 'regular' entrepreneurship?   

Both social entrepreneurs and regular entrepreneurs are driven to identify problems and find solutions.  ‘Social’ is an important and useful modifier of entrepreneurship for several reasons.  The addition of the modifier ‘social’ to the term ‘entrepreneur’ conveys a mindset of self-empowerment towards changing systems, building better organizations and communities, and scaling solutions.  There are also differences in business model.  For instance, the beneficiary or customer of a social enterprise is often not able to afford to pay the entire cost of the product or service plus a profit margin.  For most other enterprises, the customer can pay enough to result in a profitable, and even extremely profitable, venture. 

How can we be better at solving social problems? 

All panelists agreed that the movement has made good progress but there is much more to be done.  For example, we need more robust legal and regulatory environments so that social entrepreneurs can be more effective in achieving their missions and scaling solutions. 

In celebrating the successes of social entrepreneurship to date, let’s not assume that we can solve all problems with social entrepreneurship alone.  We need to make sure that we continue to address those issues that social entrepreneurship can tackle, and combine social enterprise tools with all other tools in the available toolkit, such as mobilizing governments and advocacy. 

Impact Law Forum at IDEO.org

How might we as lawyers use human-centered design to improve the legal profession? This was the topic of the April 23rd meeting of Impact Law Forum at IDEO.org’s San Francisco office.

Social impact attorneys, legal professionals, and law students gathered to meet one another and hear from Sean Hewens, IDEO.org’s Knowledge Manager and In-House Counsel. Sean led a discussion about ways that lawyers can more closely integrate design thinking and the legal profession. He began by defining the terms “design” and “human-centered design,” then offered a series of thought-provoking questions to engage the audience in thinking about the lawyer role in alternative and nontraditional ways. Sean wove in his own experiences as a police misconduct investigator, corporate attorney, graphic design student, nonprofit and social enterprise founder, and his current position, where he oversees IDEO.org’s mission to spread human-centered design throughout the social sector.

How can we communicate better with clients and other non-attorneys? In Sean’s view, by applying a few principles of design. With humor, Sean offered the following 6 design principles: (1) Never use Times New Roman; (2) Use one space between sentences, not two; (3) Learn the creative suite; (4) Use Keynote instead of PowerPoint; (5) Be visual, in preparing written materials and in thinking about legal challenges; (6) You’re already smart, so be creative too. He supplemented each design principle with an explanation of why it matters. The overall take-away: lawyers have a lot to gain – better relationships, clearer communications, improved public perception – by moving beyond the way things have always been done.

How can we provide better legal services to our social sector clients? By applying the human-centered design process to delivering legal advice, building a law practice, understanding our client’s individual problems and educating ourselves on social sector problems at scale. According to IDEO, “human-centered design is a process that begins with gaining deep empathy for a customer’s needs, hopes, and aspirations for the future. Human-centered design helps us create innovation that is rooted in people and the broader context that shapes their daily lives.” To learn more about HCD, check out HCD Connect. Sean pointed out that HCD works particularly well when applied to social sector problems, as shown by IDEO.org’s projects in the areas of health, gender, sanitation, water, agriculture, and finance. The intersection of law, HCD, and social sector problems presents a rich opportunity for significant positive impact.

How can we be more than just lawyers? There are a variety of ways in which lawyers can break out of the traditional mold of legal thinking and be more than just a lawyer. A great starting point is to build upon a skill that we all share – the ability to problem solve. Another way to be more than just a lawyer is to work with other disciplines and intentionally put ourselves on projects, teams, and engagements with people from other professions and backgrounds (being mindful of the rules regarding the unauthorized practice of law, fee splitting, referrals, etc.). Another idea is to stay on the edge of technological innovation and find ways to use new technology to improve legal services, communication, and delivery.

How can we find the opportunities for design and HCD? Start looking for ways to learn design and HCD, and the opportunities will come. Enroll in a design course at a local college or university, or read HCD Toolkit. Sean noted that balancing a new experience, such as taking a design course, with the daily demands and obligations of a ‘lawyer day job’ is a healthy challenge. It encourages us do a better job of problem solving with both sides of our brains.

How can we fail, and then talk about our failures? In the HCD process, it’s good to fail fast and fail early. It’s almost a requirement when design prototyping and testing. In the legal profession, failure can mean malpractice, disappointed clients, getting fired – none of which we want to happen, let alone talk about openly. Similar to the legal profession, the social sector has not been good at talking about or acknowledging failure when it happens. It was a difficult concept for the audience to take in, but Sean pushed us to think of ways lawyers can innovate (even if it means failing) without the obvious risks of malpractice liability, losing good clients, and other very real concerns.

By the end of his talk, Sean had raised numerous questions, some quite open-ended and difficult to answer. Impact Law Forum is exactly the venue where these types of questions can be asked and debated, openly and honestly. ILF invites you to attend a follow-on brainstorming session where we’ll tackle some of the questions Sean raised.

Back to Basics

What are some good resources that I should read if I’m thinking of setting up a nonprofit in CA?   Where can I find step-by-step guides to incorporation and tax exemption?  Where can I find trustworthy information online? 

My response to these commonly-asked questions may surprise you, because there’s nothing special, sexy, or creative to it.  These are my absolute go-to resources:

For one reason or another, I'm on these sites daily.  They're bookmarked in my browser.  They're the ones I tell all of my clients and prospective clients to read and reread. 

Let’s start with the IRS.  If you’re not bored to tears just thinking about visiting the IRS website, then you’ve already ahead of the game.  And way ahead of most entrepreneurs when it comes to self-educating, asking informed questions, and innovating.  The Service has taken great care to keep its site updated and accessible, including publishing guides on all sorts of entrepreneurial topics, from Charitable Contributions, to Starting a Business and Keeping Records, to Unrelated Business Income.  

What’s so great about these sites?  Everything published on them – every example, instruction, FAQ, deadline, filing threshold, address – is TRUE.  Because the government said so.  You can be confident in relying on information on these sites, much more so than on any other information provider, lawyer blog (even this one), forum post, etc. 

Another reason to love these sites?  They can save you a lot in legal fees.

Legal Workshop on Hybrid Structures

The law firms of Morrison & Foerster, Jones Day, and Adler & Colvin presented a workshop today entitled “Hybrid Structures:  Nonprofits, For-Profits, and New Corporate Forms.”  The presenters included Susan Mac Cormac of Morrison & Foerster, R. Todd Johnson of Jones Day, and David Levitt of Adler & Colvin.

The audience consisted primarily of entrepreneurs at nonprofit organizations, including a significant number of Ashoka Fellows, staff, and partners. 

The presentation began with an introduction to social enterprise – what do we mean by this term?  What are some definitions and examples?

The presenters then discussed the menu of available legal forms, focusing on “hybrid” structures, where social, environmental, and economic missions are embedded in one or more legal forms.  They discussed how the various models may or may not be effective in maximizing social and environmental goals through company operations.

Keeping his nonprofit audience in mind, David Levitt explained what an existing nonprofit with varied streams of revenue should consider if or when it decides to form a for-profit subsidiary or affiliate.  Why might a public charity establish a subsidiary?  Some reasons include expanding revenue-generating activities, limiting liability, protecting tax-exempt status, providing investment opportunities, and offering equity compensation to attract employees.  David also discussed the following types of tandem structures: for-profit subsidiary of a nonprofit; nonprofit under control of for-profit; brother-sister relationship; independent but aligned (overlap in board members, contractual relationships).

The presenters highlighted the following online legal resources for social entrepreneurs: LawGives, Law for Change, and Mission Investors Exchange

The presentation was recorded and the webinar will be available online for free.  Visit the Morrison & Foerster website for more information.