Promise Me You Won’t Start an Arts Nonprofit
This post is part of a series exploring what it's like for an artist to have an entrepreneurial mindset, and all of the different challenges that can come with it.
Please, for the love of all that exists, don’t go and start a nonprofit because you think you’re supposed to. There’s a myth that only nonprofits can take advantage of the granting system or give individual donors write-offs. Nope. There’s a better way: it’s called fiscal sponsorship. I think every theatre, dance, film, and music artist and/or group should be fiscally sponsored. It’s a great way to understand the basic level operations of a nonprofit without being one, while also giving you the ability to work on your fundraising, development, and grantwriting skill sets.
Most people aren’t even aware of what fiscal sponsorship is, so here’s the short definition:
The fiscal sponsor extends some of the benefits of their 501(c)(3) status to the projects that they work with so that they can solicit tax-deductible donations.
Some is the operative word here. I want to point out that some is actually a lot of bells and whistles which cuts down on many avoidable headaches so you can run your creative company and get your work done. When you are fiscally sponsored by a nonprofit, also known as a 501(c)(3), you are umbrellaed under that organization’s IRS status, again, to a certain extent. You aren’t a nonprofit—you are fiscally sponsored by the nonprofit with which you have this unique relationship.
I think every theatre, dance, film, and music artist and/or group should be fiscally sponsored. It’s a great way to understand the basic level operations of a nonprofit without being one, while also giving you the ability to work on your fundraising, development, and grantwriting skill sets.
Here are a few of the advantages of being fiscally sponsored:
*You can give tax write-offs to your donor base anytime you run a fundraiser online, in person, or through snail mail.
*You can accept non-cash donations from businesses and give them a write off. A vendor is much more likely to donate a platter of food for a benefit show or a run of full colored posters for your next production if they can get a tax break. Plus they get to look good.
*You can apply for some grants that only 501(c)(3) organizations can apply for. You apply through your fiscal sponsor.
*All the above gives you more credibility in the eyes of your donor base and the performing arts field overall.
What does the fiscal sponsor get out of this relationship with you?
*A percentage of all the above: individual donations and grants, for example, are about 7 percent. If someone donates one hundred dollars to your annual appeal, they take seven dollars off the top and you get the remaining ninety-three.
*Warm, fuzzy feelings.
But I really want to be a nonprofit. I think it would make people take me more seriously.
Yeah, sure, but it’s a shitload of work and comes with a bunch of other factors to consider:
*You’ll need a Board of Directors, which includes a President, Vice President, Secretary, and Treasurer. These are people from various sectors of your community who tend to have the business acumen you need to stay sustainable and profitable. These in-the-know folks need to be completely committed to your artistic vision, and you have to listen to what they say even when it goes against your instincts.
*You need to hold a meeting once a month with the above Board and take detailed minutes on the conversation. Not a terrible thing, but totally mandatory.
*You may need a Directors and Officers liability insurance policy (depending on your state’s requirements) specifically for your Board as they are seen as fiscally responsible if anything goes haywire. This insurance will protect them from getting sued and it’s not cheap.
*You may need other forms of insurance that only come with being this type of entity depending on the state you live in. Errors and Omissions is one that can be required. Again, an expense that seems unnecessary if you are a small ensemble or individual artist that doesn’t have a decent budget.
Being a nonprofit has its perks. You are exempt from paying taxes on the corporation, which is sweet. Instead of that 7 percent cut if you’re fiscally sponsored, all the donations and grant funds are yours to use. Not all fiscally sponsored projects can apply for the same array of grants that a nonprofit can. You don’t have to pay property taxes if your company owns the building and grounds the building is situated on. You can also get discounted postage rates for mass mailings.
How much revenue are you expecting to be making? How many assets are you going to be trying to protect? Those are the two questions that you need to ask yourself in terms of whether this business model actually makes sense. Setting up as a nonprofit is a complicated process, so you need to make sure you are in a position to take on the responsibility that comes with it. Also—this is extremely important: if you choose to dissolve the nonprofit, you are required by law to give your remaining assets to another nonprofit (that means the twenty-five thousand dollars in the bank that could be distributed amongst the owners if you were set up as a for-profit entity). The nonprofit model is a long-term one, not something to go into lightly.
The vision and mission of the organization is imperative. If the people starting this organization aren’t on the same page, it’s going to get ugly fast. Not to mention that arts nonprofits in general are competing with one another for the same funding. It would be wonderful if there was enough in the pot for everyone, but that’s not the case. If you are expecting to be rolling in grant funding by starting a nonprofit, I need to burst your bubble right now. The percentage is around 15 percent, sometimes 25 percent of your funding. Most of your funding comes from individual donors.
The good news is that if your heart is set on being a nonprofit, you can work your way up to that by first getting fiscally sponsored, making a lot of mistakes, and learning through trial and error. Then, if it makes sense to go in that direction, wicked.
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I think it's important to add that if you choose the fiscal sponsorship route, your organization is considered a independent contracted employee to the sponsor organization. Your organization or project will receive a 1099-MISC form from the fiscal sponsor and you or your organization will be responsible for paying taxes both federal and state on the income that you received through donations, services, and grants.
Just because your fiscal sponsor is tax exempt does not mean that your organization or program is as well.
Orgs like fractured Atlas - where yes, they are great for the services they provide and your donors can deduct their donations to your program - they don't mention outright that you will have to eventually pay taxes on everything in the end. In my opinion this is a big reason for doing the work to become an official 501(c)3 tax exempt corporation with the IRS.
Any non-profit can be a fiscal sponsor but you are most likely to find a welcome reception with those organizations that already know you/your work and/or are in a closely related (complimentary, not competitive) field. For example, an independent musician could ask a music-based non-profit he/she knows to act as a fiscal sponsor in cases where the grantor requires a 501c3.
Yes, this is true but a lot of nonprofits don't have the infrastructure (not to mention time) to manage this. Every state is different with their laws and requirements and puts the nonprofit in a position of having to document these transactions with a keen eye. That's why I like the national organizations I listed below under Andrea's comment. This is part of their overall mission and therefore they have a systematic approach that has been tested and streamlined.
I know people who have gone the route you speak of with organizations that don't have this capacity in place and it can go south fast.
What Fiscal Sponsor organizations do you recommend for Creative Driven companies?
All these folks are top notch:
If you are MN based there's http://springboardfortheart...
Fractured Atlas has been mine for over 5 years. I love their services and the organization in general.
Thanks so much, I went with Fractured Atlas! :-)
Fascinating information! I had never heard of this (being fiscalling sponsored rather than a non-profit) before. (And I suspect many others haven't either.) Thank you!
This is incredibly specific and helpful. Thank you!