Every baker who works with sourdough knows the magic of the starter. You feed it, nurture it, watch it grow. And when it's thriving and strong, you can split it. The original baker keeps their starter going. The new baker gets a portion with all the same living culture, all the same capability to make great bread. Both starters carry forward the same foundation, just in different kitchens. That's how spinning out a fiscal sponsorship project should work. But until recently, it hasn't.
The Industry's Graduation Problem
The fiscal sponsorship sector has a blind spot. While platforms obsess over onboarding projects, almost none have built processes for spinning them out when they are ready to become independent 501(c)(3) organizations. Research across 15+ platforms reveals that only 2 organizations explicitly document spin-out support, and zero software platforms had built actual spin-out functionality.¹
This creates a painful reality: transitions that should take weeks stretch into 6-18 months.² Projects lose historical data. Recurring donations drop by 20-40% when donors have to re-authorize payments.³ Financial records fragment across systems. Banking relationships reset completely. The very success that makes a project ready for independence becomes a crisis of logistics and lost institutional memory.
Here's what gets us: graduations should be celebrated. When a project grows strong enough to operate independently, that's a win for everyone. The fiscal sponsor fulfilled their mission. The project proved its model works. The field gains a new, sustainable nonprofit. Yet the technical and operational chaos turns this milestone into something projects avoid or delay far past the optimal timing.
Keeping the Mother Alive
At Mazlo, we've approached spin-outs differently by thinking about what actually needs to transfer and what needs to stay intact. The sourdough starter gave us the metaphor, but the compliance and accounting infrastructure gave us the blueprint.
In a traditional spin-out, the project loses everything. The fiscal sponsor's accounting system holds all the transaction history, but the project can't take it with them because it's embedded in the sponsor's QuickBooks or Sage instance. The banking relationship belongs to the sponsor, so transaction history lives in accounts the project never owned. Payment processors like Stripe and PayPal can't transfer because they're tied to the sponsor's EIN.⁴ Donor data sits in the sponsor's CRM. The project essentially starts from scratch, trying to piece together their own history from CSV exports and summary reports.
That approach treats the technical systems like they're the point. But they're not. The point is the foundation those systems represent: proper fund accounting, compliant disbursement logic, restricted fund tracking, audit trails, policy enforcement. That's the "mother" that matters. That's what makes everything else work.
When we built Mazlo, we designed the architecture to preserve this foundation during transitions. Every project operates in their own sub-account from day one, with project-level tracking that's already separated from the sponsor's other work. The accounting configuration, the compliance logic, the approval workflows, the fund restrictions—all of this exists at the project level, not tangled up in the sponsor's master account.
How It Actually Works
Here's the process we've already used with real spin-outs:
- The decision happens. The sponsor and project agree it's time to close their relationship. This might be planned from the start (bridge sponsorship), or it might emerge organically as the project matures. Either way, the conversation happens with clarity about timing and next steps.
- The project gets their paperwork. They file for 501(c)(3) status, receive their own EIN, and get their IRS determination letter. This part takes however long it takes (typically 6-9 months with Form 1023-EZ).⁵ During this time, the project keeps operating normally under the fiscal sponsor.
- The project applies for a Mazlo account. With their new EIN and determination letter, they go through our standard nonprofit account approval process. Because they're already Mazlo users through their fiscal sponsor, they know the system. The learning curve is zero.
- The transition date arrives. On the date the sponsor and project agreed to, something simple happens: the project account converts from a fiscally-sponsored sub-account to an independent nonprofit account. The historical data stays intact. The transaction history remains visible. The accounting configuration carries forward. The compliance logic continues working exactly as before. The fund tracking, the approval workflows, the audit trails—all of it persists.
The sponsor maintains a complete record of their work with the project up until the spin-out point. They can generate reports, produce audit documentation, and maintain their institutional knowledge. They don't lose anything.
The project inherits a fully functional financial system with their complete history intact. They don't start from scratch. They don't lose their story. They don't face a gap in their books or missing transaction records.
What Transfers Intact (The Living Culture)
When you split a sourdough starter, both portions contain the same living culture—the wild yeasts and bacteria that make fermentation work. When a Mazlo project spins out, they carry forward the same "living culture" of compliant operations:
- Complete financial history. Every transaction from their time under fiscal sponsorship remains visible and reportable. Project leaders can generate historical reports, track donor giving patterns, and maintain continuity in their financial narrative.
- Accounting configuration. The chart of accounts structure, fund tracking logic, and financial reporting setup they used under sponsorship continues working. There's no configuration gap or system relearning.
- Compliance frameworks. The approval workflows, receipt requirements, policy enforcement, and disbursement logic they operated under remain active. The guardrails that kept them compliant as a project keep them compliant as an independent nonprofit.
- Operational continuity. The project team already knows how to use the system. Staff access permissions can transition smoothly. The institutional knowledge about how financial operations work stays with the project.
- Audit trail integrity. The complete record of who approved what, when disbursements happened, why funds moved, and how policies were enforced remains unbroken. There's no gap that creates audit risk.
This matters because new nonprofits are most vulnerable right after spin-out. They're building boards, establishing governance, learning to operate independently.⁶ Having their financial systems collapse into chaos at this exact moment sets them up for failure. Maintaining continuity gives them stability when they most need it.
What Sponsors Keep (The Original Starter)
The sponsor doesn't lose their history or capability. They maintain their own "starter"—the complete record of their relationship with the project:
- Full historical record. All transactions, reports, and documentation from the sponsorship period remain in the sponsor's systems. They can generate historical reports, respond to audits, and maintain institutional knowledge.
- Compliance documentation. The audit trail showing how they fulfilled their fiduciary duties, enforced policies, and maintained proper oversight stays intact. This protects them from future liability questions.⁷
- Operational continuity. Their systems keep working exactly as before. Other projects aren't affected. The sponsor's capacity to serve their remaining projects doesn't diminish.
The separation is clean but not destructive. Both parties can move forward with what they need.
The Real-World Difference
We've watched this work in practice. Projects that might have delayed independence because the transition felt overwhelming are able to graduate when they're actually ready. Sponsors who worried about the operational burden of facilitating spin-outs can support project independence without creating chaos for their own operations.
The timeline compresses dramatically. Instead of 6-18 months of painful coordination across fractured systems, the technical transition happens on a single agreed date. Yes, there's still work to do—transferring vendor contracts, updating funder communications, handling employee benefits transitions.⁸ But the financial systems and data continuity that cause the most confusion and loss? Those work in support of the transition, not against it.
Perhaps most importantly, it changes how sponsors and projects think about graduation. When the technical barriers disappear, spin-outs become a normal part of the lifecycle rather than a crisis to avoid. Fiscal sponsors can genuinely serve as bridges to independence rather than accidentally becoming long-term dependencies. Bridge sponsorships—where the plan from day one is to graduate the project after 2-3 years—become much more viable. Sponsors can take on promising projects knowing they won't be stuck in an ambiguous long-term relationship. Projects can use fiscal sponsorship as genuine incubation without fearing they're entering a trap.
Celebrating Graduations
The sector should celebrate spin-outs. Every successful graduation proves the model works. The project became sustainable. The sponsor provided value. The field gained a strong new organization. But celebration requires infrastructure. When graduations create operational chaos, data loss, and financial disruption, they become something to dread rather than honor. When they happen smoothly with clear handoffs and maintained continuity, they become milestones worth marking.
We built Mazlo to make the mechanics fade into the background so the relationship and the mission can stay front and center. The sponsor and project decide when it's time to transition based on organizational readiness, capacity, and strategy—not based on technical limitations or fear of administrative burden.
That's what the sourdough starter model enables. The foundation stays strong. The capability transfers intact. Both parties thrive in their next chapter. And the bread keeps getting made.
Ready to learn more about how Mazlo supports the full project lifecycle? Schedule a conversation with our team to discuss your organization's needs.
References
¹Platform research conducted across Mazlo, Ribbon/Ignite, MonkeyPod, Open Collective, Tides Center/Foundation, Fractured Atlas, Goodnation, Bonterra, Blackbaud, and other fiscal sponsorship platforms. Only Aspiration and INN (Institute for Nonprofit News) explicitly mention spin-out support in public documentation. No software platforms document spin-out features. Sources: Platform websites, user documentation, and product reviews accessed 2024-2025.
²Whole Whale, "Fiscal Sponsorship: A Guide for Nonprofits," notes that the complete spin-out process "usually takes 3-6 months after obtaining your own 501(c)(3) status," creating total timelines of 9-15 months or longer when combined with IRS processing time. Schulman Consulting confirms "the process will probably take longer than you realize."
³Industry standard for recurring donation attrition during payment processor transitions. When projects must cancel recurring donations in a fiscal sponsor's Stripe/PayPal account and ask donors to re-authorize with a new entity, expected drop-off ranges from 20-40% based on standard e-commerce and fundraising platform migration patterns.
⁴Give Lively confirms "all funds raised will be sent to the fiscal sponsor's bank account via Stripe or PayPal." Payment processor accounts belong to the fiscal sponsor, not the project, and cannot be transferred during spin-outs.
⁵IRS processing times for Form 1023-EZ (Streamlined Application for Recognition of Exemption) typically range from 2-4 weeks for the initial response, but complete determination can take 6-9 months including any follow-up correspondence. Source: IRS Exempt Organizations processing timelines.
⁶Schulman Consulting, "Spinning Out of Fiscal Sponsorship," emphasizes that newly independent nonprofits "can easily be overwhelmed with all of the items that need to be on their checklists" including recruiting boards with fiduciary capacity, establishing governance policies, setting up payroll systems, arranging employee benefits programs, obtaining insurance, creating accounting systems, establishing compliance frameworks, building fundraising infrastructure, and developing legal and accounting relationships.
⁷The Nonprofit Law Blog notes that liability assignment creates tension during spin-outs: "A successor fiscal sponsor or new entity may not want to take on liabilities that may be greater than the amount of project assets, particularly if the liabilities are still unknown." Maintaining compliance documentation protects both parties.
⁸Schulman Consulting documents that "if you have W2 employees that receive benefits from your fiscal sponsor, those benefits will almost certainly be changing," and Impact Ops confirms that "US transfers typically require project team members formally resigning with notice given for the target spin out date."