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…
You 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.