In addition to being an artist advisor for individual artists I have often been asked to serve as a consultant for nonprofit organizations and artist groups. In Taking The First Steps to Launching An Artist Group or Organization, I wrote about the importance of determining your source of motivation, defining your mission statement, and what to do to achieve your purpose. In this article “Launching A Nonprofit or Profit Arts Organization”, I address the important subject of deciding whether to set up your organization as Profit or Nonprofit. Although I’m not an attorney or accountant, I have learned many things from serving on the board of directors of organizations over the years and reading material on the subject. Here, I offer some of the guidelines, the benefits and requirements to get you started.
A Few Basics
At some point you will have to decide if you want to structure and operate your organization as a for-profit or nonprofit entity. Regardless of which organizational structure you undertake, before you set it up, it is advisable to get help from an accountant and attorney.
Nonprofits are always required to incorporate; for-profit organizations can be incorporated or non-incorporated; however, incorporating is highly advisable because it prevents your personal assets from being considered assets of the organization in the case of a lawsuit.
You may also wish to consider forming your organization under an existing not-for-profit organization, referred to as an “umbrella” organization. There are many resources, online and in book form, that will help you make the decision. You can also inquire through your local branch of Volunteer Lawyers For The Arts.
Setting Up The Board of Directors
Both nonprofit and for-profit corporations are governed by a board of directors or board or trustees. If you choose to start a for-profit company, but not to incorporate, then you will not be required to have a board; however, you may wish to appoint an advisory board, or group of qualified persons who can help you to make decisions in regards to your organization, but do not have the authority of a true board.
The two major types of nonprofit organization structure are membership and board-only. The main difference between these two in terms of organizational structure is that a membership organization elects its board members, generally from its own membership pool.
In a board-only organization, the board itself is usually composed of volunteers from the community and generally appoints new board members as other members’ terms end or they resign. I advise you to spend time researching the advantages and disadvantages of all options.
If you are operating a board-only nonprofit or profit entity, be careful when selecting your initial board of directors or advisors. They should share your goals and missions and have no hidden agendas for joining the organization. Together, the board should also have these qualities: business, marketing, and legal experience; strong business associations and networking skills; positive reputations among the community; and strong relationships with the press.
Requirements/Advantages/Disadvantages of Nonprofit
Nonprofit status gives you the benefit of applying for arts grants. Often grants will only be given to nonprofit organizations.
Nonprofit organizations require a board of directors to run the organization and the board can and do override your vision. There also is the possibility for a board, at some future date, to eliminate you as the ‘executive director’ or whatever your position is.
When you go to nonprofit status it will be a challenge to protect your idea, so if your mission and idea for your organization is vitally important, consider setting up the organization as for-profit.
If the organization is set up as a nonprofit, it will have to secure a certain percent of its income from public support (contributions and donations) to maintain its exempt status. And the public wants to know its money is well-spent.
Your nonprofit does not automatically mean the organization will be tax-exempt, nor does it mean that donations to your organization are necessarily deductible for patrons. The IRS only provides for tax exemption for 501(c)(3) companies, but not all nonprofits have 501(c)(3) status.
The application process to become tax-exempt can take six to 12 months, and having donations be tax deductible requires substantial documentation of the organization’s track record, as well as an additional IRS review process.
You can download the application for tax-exempt status (Form 1023) from the IRS Web site, www.irs.gov. For more information on the requirements of being a nonprofit, refer to that website, or consult your attorney. You may also be able to apply for state and local tax-exempt status, which, depending on your state, may exempt your organization from property tax and sales tax, but again this will take a separate application process.