Why not rid ourselves of the nonprofit burden?

Chad Bauman, Director of Communications at Arena Stage, has suggested in a recent post on his blog that perhaps nonprofit resident theaters should consider casting off their nonprofit status. These are surprising words given the rather generously supported theater where he works. When I suggested in my recent post L3C Cha Cha Cha (referenced by Mr. Bauman) that some nonprofits might have been more appropriately organized at the outset as L3C’s (if such a model had existed at the time) I was not suggesting that current nonprofits give up their 501(c)3 status. Putting aside the ‘charitable and educational’ mission implications for the time being (an important topic for another day, perhaps), there are clearly legal and financial implications of such conversions that would need to be weighed:

  • First, once you add the tax burdens and increased expenses and eliminate the contributed resources to support both capital growth and ongoing operations I would venture to say that the current programming model, buildings, and administrative staff infrastructure for most resident theaters could not be supported. Becoming for-profit doesn’t simply result in the loss of government grants. Among other things, giving up nonprofit status also means losing the ability to accept tax exempt contributions and losing (in some states) property tax exemption. I assume it may also result in the necessity to pay higher wages to actors, stage hands and more competitive wages to administrative staff.
  • Second, donations come with restrictions and the assets of a nonprofit cannot simply be turned over to a for-profit. To use Arena Stage as an example, public and private donors gave money in good faith to support its operations (now and in the future), and to build its impressive buildings believing that funds would be used in perpetuity to support the mission.Would those gifts need to be returned or transferred to another nonprofit? Would the buildings need to be turned over to a qualified 501(c)3 organization? Would Arena need to pay back-taxes on its buildings? (BTW, it’s recently been reported that the Annenberg Foundation may ask for the return of the remainder of its $50 million gift to the Philadelphia Orchestra because the symphony has recently filed for Chapter 11 bankruptcy protection).
  • Third, I think that Mr. Bauman may be overestimating the degree to which additional user fees (higher ticket prices in exchange for VIP amenities, for instance) could compensate for some portion of the loss of contributions, especially when Arena is already charging as much as $110 for tickets (in other words, I’m not sure how much more people would be willing to pay). Furthermore, Arena could lose patron trust and goodwill by converting to a for-profit: to the degree that some of its loyal subscribers actually care about its mission and go to shows at Arena Stage in order to support that mission, it’s not unreasonable to think that some might shift their loyalty to another nonprofit theater (Woolly Mammoth, for instance)?
  • Fourth, Bauman suggests that some of a nonprofit’s donors (its board members, for instance) might become ‘investors’; perhaps, but then one assumes they would be expecting to share in profits. If surpluses are small or nonexistent then it stands to reason that, in time, such investors would find somewhere else to put their funds. Moreover, I don’t recall hearing any commercial producers saying it’s become easier in recent years to find investors for their shows. Bauman also suggests that becoming for-profit could eliminate the volatility inherent in the nonprofit business model; but I’m not sure why he thinks that a market-driven model would be any more stable than one reliant on contributed revenues? Commercial and nonprofit entities alike are in search of new business models these days.

From where I sit (and albeit, that is not and never has been at the head of a theater like Arena) large leading nonprofit arts institutions (like Arena) benefit from the nonprofit model far more than they are burdened by it. The majority of all contributions to the nonprofit arts and culture sector flow to such institutions. If any nonprofits would benefit from considering a new model it is most likely those smaller institutions that have a very slim chance of ever becoming recipients of significant contributions (hence the recommendations in my L3C Cha Cha Cha post). Indeed, given the fact that Arena Stage has a brand new $125 million building, I imagine largely paid for through contributions (one assumes with significant gifts from the Mead and Kogod families), it strikes me as somewhat cheeky to suggest that the nonprofit model is not working for Arena and that such donations are easily replaced with other revenues sources with a few tweaks to the business model.

Sisyphean Toil image by sellingpix, licensed on Shutterstock.com.

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Comments

  1. Michael Wilkerson says

    Diane,

    We seem to be on a mad theoretical chase after another model to support the arts. Sometimes I think we confuse tools with purpose. I agree with you that Arena simply cannot become a for-profit, unless it’s going to put on purely commercial works exclusively. Even with that, purely commercial theaters aren’t making it any better (or as well) as nonprofit theaters. I wonder what the real motive is here — is it to offer profits to investors, or even staff, whose incomes are constrained to salaries only in this crazed entrepreneurial society we’ve created?

    What concerns me the most is that innovation (see previous discussion!) is going to decline dramatically as arts organizations relentlessly pursue these “new models,” which, however virtuous in some cases, seem to have unleashed a race for money that obscures why we all got into this in the first place — our belief in true art.

  2. says

    Dear Diane,

    Thank you for your interesting insights on the cultural effects of financial structures in arts organizations. As someone who has worked in both the non-profit theatre and the for-profit film world, I’ve been interested in this subject, as I’ve come to think that financial structure makes a big difference in the kind of art that it is possible for various organizations to make. I’ve posted a paper on the subject, called The Movie Business, which can be found here: http://www.delphifilmfoundation.com/crazylikeafoxmovie/movie-business/.

    Best wishes,

    Richard Squires
    Delphi Film

  3. says

    Diane,

    Thank you for furthering the conversation. With this post, you have given me, and your other readers, more to think about.

    I wanted to take a moment to clarify that my post as referenced in your article was never intended as a recommendation, for any theater including Arena Stage, however it was intended to merely ask a question in an attempt to further conversation in the field. It seems like it did the latter, but in doing so, could have been consumed as a recommendation. I specifically tried to avoid this by titling the post with a question, not a statement.

    Similarly, it wasn’t intended to be a reflection upon my current position or employer. The use of “we” as a pronoun in my post was in reference to the field, not to Arena Stage. I should have been clearer, and have now clarified this position in my final paragraph.

    Personally, I do believe that there are companies, especially those just now forming, that should take a close look at all the options available to them instead of immediately jumping to the 501(c)3 conclusion. That being said, what is appropriate for one organization might not be appropriate for another, as this is a highly complex issue.

    I write from the perspective of a communications director, and my blog is focused toward arts marketers. As such, I am not singularly qualified to provide any specific governance recommendations. However, as someone who is intrigued by this conversation, I did raise specific questions and attempted to address them from my specific perspective. In doing so, I tried to recognize my lack of experience and training in this matter by stating “This isn’t my particular area of expertise so my thoughts might be naive or worse yet, impossible.”

    As always, I look forward to reading your future posts.

    Chad Bauman

  4. Clay Lord says

    Diane,

    I do wonder, however, whether organizations of the type that Arena is (here meaning organizations that have substantial earned income percentages – something, I think, like 65-70% – and healthy if not particularly growing subscription bases) might not be more successful than many others, were they to choose to wander down this path. Or like Roundabout, whose subscribers are so entrenched as to have both a tremendous loyalty to the organization and something of a stranglehold on programming. It would seem to me, again, from a very lay perspective, that that infrastructure, which, yes, does also facilitate much benefit derived from being nonprofits, would potentially provide padding on the journey to something new as well…

    It also seems to me that, if the largest organizations are meant to continue with their tax exempt status etc etc, that doesn’t really so much incentivize any other hitting from companies lower down on the size scale. We have a small company here in San Francisco that is structured as a for-profit, serves free beer at every play, is very popular with a certain set, all that fun stuff, but I can’t possible see it growing in any sustainable way. I wonder if any seismic shift really needs a big ole major house to take such a step in order to provide the blueprints – just as, now, most of the thousands of new arts nonprofits look at the histories of the regional tentpole theaters as a path forward to future success and relevance (right or wrong). Great thoughts, as always!

  5. says

    Clay – I agree with you that there’s no reason why a large theater couldn’t start with an L3C or commercial model and perhaps create an alternative path for theater companies of all sizes to consider … and would suggest that we are not necessarily better off now because the nonprofit model was so entertwined with the formation of the regional theater movement in the mid 20th century that it became the default model. Where we may disagree is that I don’t see conversion (specifically) from a nonprofit to a commercial entity as something that would necessarily behoove the current companies, particularly historically leading companies like Arena that have significant assets (for the reasons outlined in my post). But, sure, why couldn’t a new regional theater be formed at the outset on an L3C or commercial model (and it might, in fact, be more appropriate than nonprofit, particularly if they want to program Tony-award winning hits and use the occasional celebrity and charge high prices, etc.).Or perhaps a situation where a nonprofit has already lost its assets and closed up shop and a building is sitting unused, et cetera, there could be a possibility of trying something like an L3C or commercial model in a next incarnation? Hard to know without fully understanding the legal ramifications. Any bankruptcy attorneys or specialists in nonprofit conversions want to weigh in here?

  6. Meryl Krieger says

    Diane: You’ve hit this on the nose. The issue becomes, was this said in a moment of exasperation (which approach I’m more prone to buying given Chad’s response above) and yet he identifies a real problem. That is, the nonprofit model has such severe limits on the kinds of directions nonprofits can grow in, plus the reality that funding foci for foundations and indeed the government shift a lot more easily than a nonprofit can shift how it is understood, identified and used by its constituency.
    Thus I’m taking this as a rhetorical statement (again, backed up by Chad’s comment) and am really glad to stick my nose into this discussion. The problem we face is that nonprofits are really not designed to be flexible in terms of their missions, Should they be? I’m certainly not a lawyer – just a performer and sometime program administrator/consultant so my opinions should be taken for what they are.

  7. says

    i happen to be the translator of all the handke plays up to and including WALK ABOUT THE VILLAGES [Ariadne Books], of the first Kroetz plays, of Tankred Dorst’s FERNANDO KRAPP, and playwright in my own right meanwhile, and have been in Seattle for 15 years, which did Handke and Kroetz in the 60 through the later 70s. My translation of FERNANDO was the final nail in the coffin of the AHA theater, the first of about seven small nonprofits to bite the dust while I have been here, the Burke M. Walker-founded EMPTY SPACE being the most important of the lot, but Arne Zaslove’s BATHHOUSE THEATER coming in as a close second. Aside the kind of mismanagement endemic to such enterprises, other reasons for their demise are a generational change where the impulses, the curiosity of which these theaters lived is absent, to the extent that the best of the three major theaters here, THE INTIMAN, closed down within half a year of Bert Sher’s departure, 3 million in the hole. ACT under Kurt Beattie appears to survive by doing Broadway fare, Neil Simon currently. Thus I think the distinction between commercial and subsidized minority taste is a false one, in nomenclature. Moreover, once you get to know the people involved in theater here, the critics, the various artistic directors, the head of the University of Washington’s Drama School, and those at other schools, you realize why they are here, stuck in all-American provinciality. Nor are the nice to each other. At greater length I discuss all that at my http://artscritic.blogspot.com/ xx michael roloff

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