Anyone who does business with anyone will likely know the essential elements of a valid contract (I’ll give you a moment to review your notes). But we don’t often consider how many interconnecting contracts we’re a party to at any given time. There are all of our personal service contracts — mobile phone, Internet, utilities, mortgage, auto lease, and on and on. And there are bundles of contracts involved in whatever business we do — suppliers, banks, employees, and such. A ticket to a performance is a contract, as well.
Current economic theory suggests that the organizations we work in and contract with are, themselves, only bundles of contracts. Says the classic 1976 article by Michael C. Jensen and William H. Meckling:
“…most organizations are simply legal fictions which serve as a nexus for a set of contracting relationships among individuals.”
And yet there’s one essential contract we seem to forget about in the nonprofit arts — the contract that defines our relationship with the public trust. We talk about nonprofit status being ‘granted’ or ‘given’ by the Internal Revenue Service. But really, it’s a binding contract between our organizations and the public.
There’s a valid offer: Our articles of incorporation, bylaws, and financial behavior, all of which promise that we’ll do things only charitable organizations would do.
There’s a valid acceptance: The ‘letter of determination’ from the Internal Revenue Service.
There’s an intention to create legal relations: The stacks of documents and forms we shuttle back and forth with the IRS upon our formation, and in required reporting thereafter.
And, of course, there’s consideration: For the organization, there’s a bundle of fiscal benefits including contributed income free of taxation by the donor, exemption from corporate taxes, exemption from sales taxes, discount postage, and the like. For the IRS, representing the public, there’s the promise of charitable behavior as well as the promise not to do things that aren’t in line with charitable purpose.
That’s a contract. The IRS is, essentially, the trustee representing the public. The governing board is the trustee representing the organization, responsible for proper execution of the promises made.
So often, when I hear arts or service organizations talk about nonprofit corporate status, it sounds like a bundle of benefits they’ve been given because their work is special or worthy. But, really, it’s a contract. It carries consideration for both sides. And therefore, it comes at a cost to the organization (that we hope is equal to its benefits).
There’s a fair amount of discussion at the moment about what the consideration should be for nonprofit status in the arts — that they owe it to the public to be more diverse, more risk-taking, less commercial, more engaged with their communities. But the particular nature of this contractual relationship is that the organization gets to define how their work serves the public trust, and the IRS, its donors, and its supporters get to decide whether that definition is sufficient.
That said, if an organization doesn’t continually express and explain how it lives up to its part of the contract, it leaves the question open for others to interpret. And if an organization, or its board, forgets that it’s part of a binding agreement, it’s stepping dangerously toward breach of contract.