Is the Not-for-Profit Structure Destructive?

NFP has been and always be a disappointment for the arts business. I completely agree.

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Right -- fiscal sponsorship is an excellent alternative for many artists and artist organizations. One of the most prominent is Fractured Atlas, which has recently expanded their reach. An interesting question to explore will be where the break point is in growth, i.e. when does it make sense to break out of the fiscal sponsorship and into one's own independent organization.

Hi, Jim, Your blog was fascinating! I've never looked at the 501 C3 from that angle. I was poking around on line and came up with this information. What's your opinion on Fiscal Sponsorship as an alternative?

What is Fiscal Sponsorship? Fiscal sponsorship is an alternative available to individuals or groups performing charitable services and wishing to give their donors the ability to take a charitable contribution deduction, but not wanting to spend a great amount of time and resources to comply with the extensive filing requirements, tax compliance, and other legal obligations associated with incorporation and tax exemption. Fiscal sponsorship typically involves an arrangement under which an existing 501(c)(3) tax-exempt public charity (commonly referred to in this context as a “Sponsor”) assists an individual or organization with a charitable program (commonly referred to as a “Project”) by permitting the Project to solicit tax-deductible contributions or grants through the Sponsor that the Project is not eligible to receive on its own. Through such an arrangement, funds intended for the Project are deposited with the Sponsor, which then disburses them to the Project.
http://www.publiccounsel.org/cdp/fiscal_sponsor.pdf

In response to Laura's comment about the nonprofit board reallocating funds intended for an artist, we have the nonprofit include a sponsorship agreement form in their contract package before we release funds. This is signed by both the nonprofit and the sponsored group/artist and says what the funds will be utilized for.

Right on!

I do believe there is a way to make a contribution to an NFP to support the work of an individual artist. My advice -- check with a lawyer who works in this field. I plan to.

Artists need an advocate concerning the business of art with non-profit groups. Often, non-profit board members are learning as the go and do not have a contract or dedicated plan concerning a commissioned artist. Whereas, after the artist writes/acquires a grant for their own art work under the auspices of the non-profit, the board of the non-profit group has the right to reallocate the original grant/donations toward other interests. Educated, on the site, advocates for both the board and the artist are a missing link toward working policies.

Yes, I do help administer the funding program. We only fund nonprofits, so if an individual or group does not have that status, they can use a fiscal sponsorship in order to receive funding.

Many other foundations and government entities only fund nonprofits, so I'm not sure the NFP model is adopted solely for tax deduction purposes.

Good comments and discussion, especially the possibility of tax evasion for giving to a certain student. Would that be the same for supportng an individual artist though? I look forward to reading more!

An interesting idea. I run a theatre company that has been using a fiscal receiver for four years now. I have often said "Okay, now it's time to incorporate for ourselves" but then I realize all that would go into it. We're a very small organization with a small board and me doing almost everything.

Our fiscal receiver takes a larger percentage of our donations than I would like, but the money goes to fund arts activism in our state, so I don't mind all that much. There have only been a couple of instances where the fiscal receivership got in the way of applying for funding. The arts grants from the state, county and city I live in all accept proposals through a fiscal receiver. I'm not aware of how it is in other states, but I hope there is as much acceptance. We have received private foundation funding as well through our fiscal receiver and it's been just fine.

I recommend this to anyone looking to start a company. Think of the fee you pay the receiver as a convenience fee to rid you of the headaches that come if you don't have an excellent staff accountant.

I am excited to hear that a growing body of arts-involved people are raising this question of organizational format. I think social enterprises offer a compelling model for the arts (especially for start-ups), but unfortunately the term "social enterprise" seems so ambiguously defined at present that little progressive action has taken place. Still, I do have high hopes for this format, and alternative business structures like the L3C, as powerful vehicles through which the arts can more effectively act as an engine of social change. I find great hope in organizations like Artists for Humanity and several international arts organizations who have experimented with alternative/hybrid structures. Thanks again for bringing this issue into the light.

I do believe the regranting process you describe (and administer?) is fairly common. The regranters, however, do have strict guidelines to protect them (probably in part because of the culture wars brushups from the 1990's). In answer to your question about giving to a specific individual artist through an organization, the anwser is no. I ran into this when I was Dean at the Eastman School of Music, when well-intentioned donors wanted to give gifts to support specific students. This was not allowed, as it opens the door to tax evasion practices, e.g. a parent giving a gift to cover his/her child's tuition. Maybe there are others who will weigh in on your good questions.

Good comments! -- I'll get to board members in future blogs (!). What is the title of your book?

There are uses for the NFP model, and many organizations are working well within it. That said, i think almost everyone would agree that if we were to start over with the same intent as when the model was born, that we would build a different model. There are emerging alternatives that I will blog about in the near future.

You are so "on the mark" here. The proselytizing by funders, although understandable as a wanting to be helpful and influential, contributed in a substantial way to the dysfunction I describe. I do believe that foundations understand this now and are looking for solutions. My blog was inspired in part by these misguided well-intentioned actions.

I think the break in the cycle comes from umbrella-type organizations like Fractured Atlas, which provides fiscal sponsorship to individuals and organizations (mostly small ones) at a very reasonable fee.

Terrific comments here-- thanks for them. There are alternative structures, and I do plan to lay them out for future comment...but, isn't it interesting that the apparent sole reason for adopting the NFP model is the tax advantage? This, of course, makes sense and is understandable, but good heavens, what encumbrance comes with it.

I seem to have touched an important "nerve" in the arts and culture sector. My plan has been to rant a bit about the problems and consequences of the standard NFP model, then present alternatives; however, I may need to weigh in sooner on the alternatives.

While I do like the thought behind the nonprofit model, being mission driven as opposed to profit driven, I agree that it could do with some more flexibility. Especially interesting point that Zeek brought up - how would that work for a larger organization, though?

I work for a City government and we fund smaller start-up types and individual artists if they are sponsored by a 501c nonprofit organization. The money goes to the nonprofit, who then gives it to the artist/group. Is this a common practice? If people want to make a tax deductible donation, can they donate to the nonprofit with the stipulation that it ges to the specific sponsored project and still get the tax deduction?

Good post.

I couldn't disagree more. :)

I respond here:

http://www.missionparadox.com/

Congratulations on the Drexel appointment. I spent three wonderful and exhausting years as director of the arts admin program at SMU, so I know what joys and challenges lie ahead for you.

Your point about the unintended consequences of 501c3 status is well made, but I'd suggest they are pretty far down on list of dangers facing a growing organization. In my book the greatest challenge is that the professionals (artists and administrators)are at the mercy of board members who don't have a clue about the institution's mission or the requirements of the art form. Knowledge and passion (as you point out)are in short supply, which is not the case with ignorance and arrogance: "If I can run a department store, certainly I can run an orchestra." "If you were really any good, you'd be a banker, not an arts administrator." They may not say it to your face, but they're thinking it!

it appears that a start-up, small organization and a cornerstone, gigantic organization are both hampered by the structure of NFP. Are orgs in the middle benefiting from the NFP model? i think the points of the 3rd paragraph directly speak to the problems of the model. There should be a type of reclassification so that smaller orgs can raise money and present work without being drawn under by the administrative req. of NFP status. At somepoint when your annual budget reaches a certain level and you have a certain amount of FTE, then a switch should be mandated. But the idea that a one-model solution is pragmatic is outdated, and some orgs are exploring newer models.

I’m a big proponent of our whole sector becoming more flexible in order to accommodate various ways for artists to make art and connect to participants and audiences, and look forward to reading more analysis than can be contained in a blog post. But as a former local and state arts agency funder and someone who advises artists and arts organizations, I think a lot of the dysfunction is attributable to funders, their charters and their interpretation and propagation of best practices for nonprofits. How can funders alter support systems to finance art making outside the 501(c)3 model? How can municipalities extract themselves from requiring NFP status in order to enter into contracts or allow access to space? Even more insidious, how can review bodies accept that boards needn’t get large? That sometimes it really works for artists and founders to remain on boards? That it can be just fine for someone to run their business out of their home? I’ve sat through too many grant review panels where growing a board was considered a necessary step of maturity and where surpluses were considered evidence that support was not necessary. Messages like these have been communicated loudly and clearly for years, and un-doing the “conventional wisdom” will take time, as will the reforms – in arts agencies, foundations and in the minds of patrons – necessary to allow for sensible support of art making. Examples abound – both of flexible support mechanisms and people who are managing NFP organizations successfully. Both need to be encouraged.

Most artists I know who apply for NFP status do so because it provides them with the ability to apply directly for funding to foundations, and especially the government. If anything, of late, government funding application requirements have become more restrictive/cumbersome...so in other words, if I were an independent artist, I'd probably be standing in line right now to apply for NFP status, also. How to break that cycle?

I think you raise a good point about the structure of a not-for-profit not always being suited to the work at hand. In some cases, NFP is a great structure, connecting constituents and community to the cause and creative work. I happen to like the structure for the program I lead. But in other cases, the not-for-profit structure is too cumbersome, particularly for start-ups or grassroots organizations. For many arts organizations, the quality of and access to the program offerings are subsidized by contributions. If we only could sell tickets or charge tuition, many arts programs would be severely compromised. And so we have a charitable status that allows for the tax deduction of donations, which appeals to some, if not all donors. But with this tax advantaged position comes the myriad responsibilities of being a non-profit.

I wonder if there might be a more tiered structure that could be developed so that smaller and/or start-up organizations were subject to one type of classification and set of requirements, and then if/when they grow, would be subject to increasing standards and structures. Some organizations will never "grow" in the sense of revenue or scope or scale. And that's fine. They should not be saddled with onerous structures. Others, seeking growth and expansion, should rightly be subject to increasing controls and obligations, as the size of the tax advantage of their donor base increases.

Anyhow, thanks for bringing this topic up for discussion.

Was that a cliffhanger or what?! I was so engrossed by the blog that my disappointed when it ended was immeasurable.

However, there were some very valid points brought up that may also may for great blog investigation. I can see this discussion becoming an ongoing series. Who with me?