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Re: Gathering opinions: deciding between LLC and Not-for-Profit

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Chris Blair
Re: Gathering opinions: deciding between LLC and Not-for-Profit
on Sep 29, 2009 at 5:06:39 am

Diana DiGiano: That's a charity. Not all not-for-profits are charities. For goodness sakes, think about it - most theater companies are not-for-profit. They're arts organizations

This is straight from the IRS website about obtaining non-profit status:

The Internal Revenue Service allows organizations to file for tax-exempt status under section 501(c)(3) if they fit within one of five identified categories. The organization must:

have a "Charitable Purpose"; or
qualify as a "Religious Group"; or
be considered a "Scientific Organization"; or
Serve a "Literary Purpose"; or
Qualify as an "Educational Organization".

You can incorporate in your state as a non-profit without meeting some (or in a few states) any of those criteria, but without the blessing of the IRS, you won't receive any of the economic benefits of being one.

I also specifically mentioned "arts organizations" in my reply. I worked for an arts center in Lexington, Ky for two years teaching filmmaking and animation. I also made independent films with the arts center donating space and occasionally providing the non-profit sponsorship David mentioned. I certainly understand a non-profit has to genereate revenue to survive. The arts center I worked at had an entire curriculum of after school, weekend and adult arts classes that they charged a premium for. They also charged for attendance at swanky art shows and the like. But their sole goal was to promote the arts and every penny that came in beyond covering operational costs went to that. Unfortunately, there was rarely any pennies left over for that purpose, even with outside grants from individuals, corporations and state and national funding organizations.

I also made several independent films using the sponsorship method, partnering with existing non-profit organizations, and funding was channeled through them.

We chose non-profit status (or using partnerships) for all of the independent projects we made because primarily because:

1. We wanted complete control over content and ownership.
2. We wanted to be eligible for grants from organizations like the National Endowment for the Arts, National Endowment for the Humanities, their state counterparts, and the many other funding agencies that support independent filmmaking.

But when I decided to open a production company, we never even considered the non-profit route, mainly because I wanted to make money.

I spent almost 5 years involved in the non-profit filmmaking world. I got some films made, with one airing on PBS. But at the end of the day, what I spent 75% of my time doing during that 5 years was raising money and NOT filmmaking. I wanted to be a filmmaker, not a development director. So that's why I gave it up and went the other route. Raising money for our projects was very difficult and very time-consuming. We paid ourselves salaries, but the FIRST place funding organizations balked when we sent in proposals was the salaries we listed to pay ourselves. They always thought they were too high. In reality, they were ridiculously low compared to what people make in the real world. National funding organizations were less likely to object, but educational foundations, and state level arts and humanity organizations typically thought our salaries were too high a percentage of the overall budget.

It was the classic catch-22 and both me and my partner ended up having to work freelance gigs in addition to working full-time trying to raise money and get some projects made. Then...after they were made, we had to raise yet more money (or budget it into the original funding) to promote it and get it seen, which was another time-consuming fight.

I'm not trying to discourage you, because people told me the same things when I did this 18 years ago. Did I enjoy it? Heck yes! It was great to make films I thought were worthwhile and I'm still proud of them. Two are still in educational distribution and we get royalty checks for them (the last one I got this summer was for $7.40) Were the people who advised me about the pitfalls correct? Yup...they were.

Going the non-profit route and staying true to the spirit of being a non-profit is a tough way to make a living, and the notion of starting "for-profit" arms of the company to me is a little unseemly. It's like a museum starting a business that's for-profit on the side that benefits the museum director and his staff. In my opinion it's inappropriate and it's skirting the spirit of being a non-profit. Now if they start that for-profit company and it's sole beneficiary is the museum or arts ogranization itself, with no individual profiting, then fine. But I question how an organization can, on the one hand, devote their full attention to running their non-profit endeavor, when the other hand is running a for-profit corporation with all it's demands and administrative needs.

Do many people and organizations do it? Yes, thousands. Food banks, churches, and yes probably filmmakers. They do it because it's legal. Is it ethical and in the long run good for the organization? In my opinion, no.

You asked for opinions of the folks here on the Cow about the pros/cons of for profit and non-profit. As someone who made non-profit independent films for a number of years, and started my own for-profit company (14 years now), I think I know a thing or two about both.

Chris Blair
Magnetic Image, Inc.
Evansville, IN

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