Tuesday, September 7, 2010

Should I start a Non-Profit?

First off, I have to confess that I’m not a lawyer. I was the jury foreman once, but I don’t think that counts. So please don’t take my advice and quote me in a court of law. They would probably laugh anyway. However, I did start a not-for-profit performing arts corporation in California and have acted as its executive director for the past ten years so I have learned a thing or two.

With that experience, individuals take me out for coffee asking how to start their own not-for-profits. They want to know:

1) How do I apply?
2) Can I make money with a not-for-profit?
3) Is a not-for-profit time consuming?
4) Is it worth starting one?

For number 1, I tell them to buy a book for the application process. I used the Nolo Press book, How to Form a Nonprofit Corporation. It is available from online retailers and will probably have the latest information on the process in your state.

Number 2 is easy. Not-for-profits can make money. They just can’t funnel that money into employee’s pockets at the end of year as bonuses. They have to use any extra income they make and put it back into their organization. For example, the extra revenue could be used to buy equipment or build up a savings account (read that as unrestricted operating cash reserve in “nonprofit-ese”.)

Not-for-profits are time consuming. You are setting up a corporation. (All not-for-profits are corporations.) You are breathing life into an entity with its own unique tax ID number that can “never die.” More on that later. Any time you start something like that, it is going to take some time to keep it running smoothly.

And finally, given the mission and focus of your idea, a not-for-profit can be well worth it and the way to go. For most people who talk to me, it isn’t. They are doing it for insurance reasons, to get donations, or to apply for a grant. You don’t need to be a not-for-profit to do these things. I explain at the bottom. Hint: fiscal agent.

As most people know, contributions to not-for-profits are tax deductible, but the organization also benefits from a variety of other factors. Simply put they are: tax exemptions, limited liability, perpetual legal existence, employee benefits, and formality.

The first two are pretty self-explanatory. Being tax exempt means that you don’t pay taxes on your revenue. Woohoo!! If you are a performing arts organization that makes a lot of money every year and the taxes would be a big blow to your organization, then being a not-for-profit due to your charitable existence is a very good idea. Many smaller organizations, like chamber ensembles, don’t have that issue of rolling in money so this wouldn’t be a driving factor for them.

As for perpetual legal existence, this can be a really nice thing. It kind of makes you immortal. When you are a not-for-profit, your audience can feel confident that you are going to stick around. Funders and donors are more inclined to invest in what you do too. Of course, if you do go under, there are some legal ramifications with this. Check out the disadvantages for that.

While a not-for-profit corporation can't share profits amongst employees, salaries can and should be commensurate with for-profit organizations. Your organization should make sure to have the necessary funds for administrative and artistic compensation, healthcare, pension, and benefits such as professional development.

Finally, the formality of the organization in regards to its documents (Articles of Incorporation, Bylaws, Minutes of Meetings, Board Resolutions, etc.) creates a "built-in set of ground rules...that is an important advantage...where the composition of the board includes diverse members of the community with correspondingly divergent interests." (Nolo Press, How to Form a Nonprofit Corporation in California) Without these guidelines, reaching collective decisions that benefit the community at large would be difficult if not completely futile.

Things are not completely peachy however. Not-for-profit corporations have a great deal of paperwork to deal with, the high price tag of incorporation costs and fees, and lots of time and energy to maintain.

And while the rosy gates often are opened to you if you are a not-for-profit in terms of grants, tax deductible donations, rental rates, insurance premiums, etc., two words very often can help you avoid setting up the not-for-profit in the first place: fiscal agent. Another not-for-profit with a similar mission can act as your fiscal agent and be used as a go between you and the grant, donor, insurance company, etc. Arts councils and national service organizations often act in this capacity for their constituents.

And if you form a not-for-profit and it doesn’t work out, all of your assets need to be given to another not-for-profit that does comparable work. Therefore, if all the music you bought for your symphony was paid for by the not-for-profit, every last piece of it needs to go to another not-for-profit group if the bills can’t be paid. Hopefully it will never come to that. In this economic climate though, you never know.

Forming a not-for-profit can really help you organize your mission and get your idea off on the right track. However, it can be a ton of work to maintain. If you have an idea that will keep you working throughout the year and it has a charitable mission, then perhaps starting that not-for-profit is the right way to go. Either way, good luck and make your idea happen.

About the writer: Daniel Wood is an entrepreneurial musician living in the San Francisco Bay Area. Since 2000, he has worked and mentored large and small arts not-for-profits in the areas of management, marketing, development, and board governance. As a founding member and executive director of the horn quartet Quadre (www.quadre.org) and teacher at the Community School of Music and Arts (www.arts4all.org), Daniel publishes his music with Solid Wood Publishing (www.solidwoodmusic.com) and lectures on the business of music nationally as a "Savvy Musician" advocate (www.savvymusician.com)

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