It’s Time For A Nonprofit LLC

In yesterday’s article, I mentioned the notion of a nonprofit LLC and wanted to take a moment to expand on that notion. If you imagine the world of U.S. performing arts as a brick wall then the multi-million annual budget size organizations are the bricks and the mega-million annual budget organizations function as cornerstones. Of course, there’s something else in the wall besides varying sized blocks and that’s the mortar; the numerous organizations and sole artists that have annual budgets below $1 million annual budgets and they desperately need a charitable status to work with besides the 501(c)3…

cultural motarYou tend to notice when a wall’s blocks go missing or cornerstones show large cracks but mortar is an easily overlooked yet necessary component to hold everything together. At the same time, our metaphorical small budget mortar isn’t comprised of the same material as bricks and stones yet when it comes to governance they have to play by the very same rules and regulations as their larger budget cousins.

Simply put, why should a string quartet have to use the same process designed to regulate the New York Philharmonic? A better solution would include forming a new charitable status designed to provide some of the tax advantages enjoyed by a 501(c)3 but provide the increased administrative flexibility of a partnership or sole proprietorship all while accompanied by the liability protection of a corporation. If something like this existed, it would likely resemble a sort of nonprofit LLC.

As a private consultant, I enjoy the benefits offered by an LLC; so much so that I doubt my business would be possible without it. It provides an ideal combination of liability protection, operational flexibility, and legitimacy needed to run a small, niche business. And when you look at the vast majority of under $1 million annual budget performing arts organizations, that’s exactly what they need to function properly.

These differences are perhaps most noticeable when it comes to fundraising. If you want to accept donations that are tax deductible you have to form a 501(c)3. This means forming a board of directors, complying with a mountain of paperwork, and dozens of additional that place undue burdens on smaller budget organizations and individual artists.

One of the most frustrating fundraising challenges faced by smaller performing arts organizations is the 501(c)3 litmus test employed by most private and government grants. If you aren’t a 501(c)3 then you are automatically disqualified but the mountain of requirements needed to form a 501(c)3 are usually counterproductive. As a result, these 501(c)3 requirements from grantmakers force smaller budget groups into a variety of no-win scenarios. As a result, many smaller budget organizations are forced into growth counterproductive cycles that may be contrary to the organization’s best interests.

If you believe that the arts world is in any way overbuilt, you likely know that those arguments don’t really apply to the bricks and cornerstones so much as the mortar. More often than not, smaller budget groups are driven more by the vision of the individual commonly referred to as the founder as opposed to the variety of stakeholders associated with a larger budget 501(c)3. In these cases, a nonprofit LLC model is much better suited for individual driven organizations as opposed to the 501(c)3 model associated with mission driven organizations.

Ultimately, unless the federal government enhances the types of nonprofit status offerings, you can only expect the current dysfunctional cycle to continue unabated. As a result, if the new administration has any desire to enhance its legacy within the world of nonprofit arts, it would be wise to consider these options.

About Drew McManus

"I hear that every time you show up to work with an orchestra, people get fired." Those were the first words out of an executive's mouth after her board chair introduced us. That executive is now a dear colleague and friend but the day that consulting contract began with her orchestra, she was convinced I was a hatchet-man brought in by the board to clean house.

I understand where the trepidation comes from as a great deal of my consulting and technology provider work for arts organizations involves due diligence, separating fact from fiction, interpreting spin, as well as performance review and oversight. So yes, sometimes that work results in one or two individuals "aggressively embracing career change" but far more often than not, it reinforces and clarifies exactly what works and why.

In short, it doesn't matter if you know where all the bodies are buried if you can't keep your own clients out of the ground, and I'm fortunate enough to say that for more than 15 years, I've done exactly that for groups of all budget size from Qatar to Kathmandu.

For fun, I write a daily blog about the orchestra business, provide a platform for arts insiders to speak their mind, keep track of what people in this business get paid, help write a satirical cartoon about orchestra life, hack the arts, and love a good coffee drink.

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6 thoughts on “It’s Time For A Nonprofit LLC”

    • Thanks for that Ian, it’s an interesting first step but one critical flaw I see in that post is the L3C status would still preclude groups from applying for grant opportunities due – without that component, the whole thing falls apart via the parameters above. At the same time, are you aware of any groups in Vermont using the L3C that have successfully applied for grants that require a 501(c)3 status?

  1. Well, you’re right, the L3C is not exactly what you suggested. It’s basically meant as a tool for organizations to attract program-related investments from foundations and other social investors (such as Calvert). Its implications for the arts are unclear as yet, although I do think there is a fair amount of promise if it becomes a widely-adopted standard for identifying companies with a social mission. (Think loans with favorable interest rates, micro-equity investing, etc., and greater possibility for grants through fiscal sponsorship.) FYI, you don’t have to be in Vermont to get L3C status–it’s the same method companies use to get charters in Delaware to avoid corporate tax even though they’re not headquartered there.

    The founder of the L3C, Robert Lang, spoke at my school this year and has some interesting thoughts about the future of the nonprofit sector. Unfortunately they don’t seem to have much of a web presence.

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