Because I teach the course, “Entrepreneurship in Music” at the Eastman School, I am frequently asked for advice from students who are contemplating setting up a business entity for their chamber group. They often begin the discussion by saying that their plans are to set up a 501(c)3 (not-for-profit). They usually say something like, “That way we can get funding, and we won’t have to pay taxes.” That could be true, if they qualify. But, for most groups the not-for-profit is probably not the best way to go. Here’s my quick primer, and comments from another blogger.
Not-for-profit organization—An incorporated organization, which exists for educational or charitable reasons, and from which its shareholders or trustees do not benefit financially, also called non-profit organization.[i]
These organizations are board controlled. There are no owners, but don’t be misled by the name. They can pay salaries and deduct expenses as long as these salaries and expenses are “reasonable.” In addition, they can make a profit. They are also exempt from taxation. One must apply for tax-exempt status, and by its nature these entities may be under more scrutiny. Consequently good records and squeaky-clean adherence to the rules is a must.
Many music ensembles consider this entity when they decide to formalize their relationship. And this may make sense for a group that intends to primarily perform outreach or education concerts, because the tax-exempt status sounds appealing and the educational fit is obious. They may also have the perception that they will be looked upon more favorably when applying for grants, but as far as I know there is no evidence to support that. In spite of these compelling attributes, most ensembles will do more than community concerts, which makes the 501(c)(3) (tax exempt) status an unlikely fit for most. I’m not a lawyer, but this opinion has been supported by the attorneys that I have had speak in my class.
Jim Undercofler, who has held positions as the Dean of the Eastman School of Music, and the CEO of the Philadelphia Orchestra, has recently offered an even more compelling reason to avoid NFP status. In his recent blog he goes so far as to say that NFP status, with its more stringent financial reporting regulations and ever present attention and stroking of the board, actually can impede the creation and presentation of a group’s art. His premise makes sense to me. Here’s his blog, or check it out on Arts Journal.
Posted by James Undercofler on his ArtsJournal blog State of the Art, January 28, 2010
Is the Not-for-Profit Structure Destructive?
In my new job at Drexel as Professor of Arts Administration, I’ve been able to research a question that has been of particular interest to me. Is the traditional not-for-profit, 501(c)3 (NFP) so cumbersome in its structure as to actually impede the very promise of its original intention? I’ve recently had the luxury to delve into this question, and in the process of examining it, have found what I believe are some startling flaws, but also some promising alternate structures.
So, is the NFP too cumbersome in its structure to impede the flow of artistry it is created to facilitate? As a one-size-fits-all model, the answer is absolutely “YES.” For small start-ups, and for perpetual start-ups, the requirements to achieve NFP status, as well as the ongoing requirements, from financial reporting to maintenance of a fiduciary board, often overshadow the creation and presentation of artwork.
In the arts world, an odd personalization of the NFP has evolved that has accelerated their growth in numbers. Creative artists from all areas want to create their own organization, so that they can create their art. It’s almost as if one step has to precede the other. Yes, it likely grew out of the need to raise money, and a somewhat unfounded belief that no one would give to them without the imprimatur, but back to my initial premise, the creation of an organization before the art itself proves my point, that the NFP impedes its very promise.
While at the start-up level the NFP structure presents a visceral challenge, as organizations grow larger, the effects of the structure are more subtle, more insidious. In larger NFP’s, because of the need to raise larger budget percentages of contributed revenue, boards of directors become exceedingly large, as does the administration needed to service them. These boards rarely universally possess knowledge of or passion for the mission itself. At the very least they may understand a small portion of the mission’s program activity. With these large organizational entities, flexibility is lost, and mature organizations quickly move into decline, as they cannot address the changes presented to them in their communities, from their audiences, and external factors. These organizations become “too big to succeed.” And yes, there are myriad factors contributing to this state, but high up on the list of culprits is the NFP.