Gathering opinions: deciding between LLC and Not-for-Profit
I know I will ultimately need to seek an attorney's advice about this, but I want to get some feedback from you pros. Regarding business formation, I am investigating the not-for-profit option, and the LLC. I'm in New York State. My intention is to form a production company that will focus on educational media projects.
Any of you choose one over the other when you formed your business? What were the pros and cons for you? Finally, what prompted you to choose the type of corporate structure you did?
Additional question for Non-Profits and Not-for-Profits: Do you ever hire yourself out to work on someone else's project? If so, does your company's non-profit status affect how you can do that?
Thanks in advance for your insights!
I went with an LLC to be properly protected and to be able to make a profit.
We have one post house here in town that competes as a non-profit but they hide behind a PBS affiliate station and are frowned upon by everyone in the market.
Hmm, interesting. Non-profit or not-for-profit does not mean you aren't allowed to make a profit. It simply means that the profit made, or surplus, cannot not be distributed to owners or shareholders.
Profits have to go back into the company to keep providing the services it is meant to provide. Of course, its management can draw salaries -- running a non-profit doesn't mean you have to be poor and not get paid (of course, any business owner makes a huge mistake if they do not always pay themselves a salary first).
Since my intention is to create educational/historical media, this structure could be right for me. However, I'm curious about your statement about being "properly protected" -- how would an LLC be more protected than a non-profit?
I don't know that it is. I probably know less than you about non-profits. An LCC protects me from the business should the cieling fall on a client's melon. ;) You are right to cnsult with your lawyer on this. As a business person, I assume you'd be putting money back into the business anyway. I'm not sure what the non-profit would gain you. I have to think it has tax benefits... dunno what I'm talkin about there though.
Having non-profit 501(3)c status does give many tax breaks (mostly tax exemptions except of certain kinds of monies coming in), as well as enables the corp. to apply for grants, and ask for donations which are then deductible for the donor.
Diana DiGiano: Since my intention is to create educational/historical media, this structure could be right for me.
Operating as a non-profit corporation is a slippery slope in my opinion. Most people perceive a non-profit or not-for-profit corporation as one whose aim is to provide altruistic work to aid others.
Places like hospitals, schools, arts organizations, zoos, and the like are all designed to provide enrichment to the people that use their services.
I suppose you could argue that if you're making strictly educational or historical videos, your business is the same. But as soon as you start competing with "for profit" production companies and agencies for corporate or commercial work, you pretty much break the spirit of being a non or not-for-profit company.
Like Grinner, there was a company in the town I used to live that operated like that. They'd compete with and underbid other companies for corporate work, then cozy up to the large PBS affiliate in town to receive grant supported work. They'd compete with indepedendent filmmakers for grant money to make documentaries, while at the same time producing the latest music video for mid-level country music artists. The owner drove expensive, fancy cars (yes plural), and somehow ended up on the society pages of the newspaper time and again. Then, he somehow ended up being named Production Director at the PBS affiliate, and he CONTINUED to run his business. As production director of the local PBS station, he would award local PBS work to his own company!
It was an ugly situation and let's just say he was viewed with much disfavor in the production community.
So I think the key is that if you incorporate as non-profit, you need to run your business in the spirit it's intended and not compete for obviously profit oriented projects with local and regional production companies. In my opinion, you can't have it both ways. You can't claim to be a non-profit to qualify for grant supported work (I know, I spent 3 years making independent films and have an Emmy to show for it), then turn around when it suits you and compete for that big commercial job with the large regional hospital (just because they're non-profit).
I have no idea what your plans are, but from an ethical point of view, you should take one route or the other and be true to the spirit of what being a non-profit is about.
Magnetic Image, Inc.
Oh my word. Your idea of not-for-profit production companies is really skewed in the wrong direction. There are so many of them in NYC, where I am. Other production companies that would resent a non-profit production company just doesn't get it, in my opinion.
"Most people perceive a non-profit or not-for-profit corporation as one whose aim is to provide altruistic work to aid others."
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 and not charities, but they qualify to be non-profit. For film/video production, making historical/educational media qualifies a company to establish a not-for-profit corporation. A non-profit can also have a separate for-profit arm, which can distribute its profits as any normal profit-making corporation and would pay taxes.
Besides, here in NYC with so many production companies around, I highly doubt anyone is going to even know what my company's status is, nor resent me for the work I intend to do.
Here are a few websites of not-for-profit production companies in NYS that are pretty much doing what I want to do, to give you an idea of what they're really about:
http://www.incite-pictures.com/ (For-profit arm of Cin Qua Non, Inc., a not-for-profit)
What I really want is to hear from business owners who considered both options, and the reasons why they chose whichever one they did.
well, I chose an LLC because the plan was to make a profit. A non profit set up was never a consideration. I didn't want an INC so an LLC was the logical choice... fo rme.
Me too. Hey, ain't King Crab season coming up soon?
Keep us posted.
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Hi, so are you saying you researched both types of corporate options and chose LLC? What do you see as the benefits and/or limitations of both? Thanks for contributing -- I'm really looking forward to some good feedback on this topic.
[Diana DiGiano] "Hi, so are you saying you researched both types of corporate options and chose LLC? What do you see as the benefits and/or limitations of both? Thanks for contributing -- I'm really looking forward to some good feedback on this topic."
I consulted with my CPA before forming the company and due to the size of the company (very small) and the type of work we do, he strongly recommended LLC as the tax benefit (and savings) was better going the LLC route vs. S Corp. Here in Georgia it only costs $75 to file for an LLC and you can do it yourself online, it's very easy.
I haven't read the entire thread so I apologize if this has been answered, but have you met with a CPA yet? If not, that is the first thing you should do. If you don't know of any, ask around for a recommendation or look at the Better Business Bureau website in your area.
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Okay, so I guess my original question was not as clear as I thought it was. I don't want to just hear from people who knew they wanted an LLC from the get-go, or who don't really know much about the not-for-profit structure.
I was hoping for responses from people who had researched both types of corporate structures, and who know enough about both to be able to discuss the benefits and/or limitations of either one, which is what I meant when I wrote:
"Any of you choose one over the other when you formed your business? What were the pros and cons for you? Finally, what prompted you to choose the type of corporate structure you did?"So, anyone out here at the Cow who can answer from an informed viewpoint and tell me about the choice they made?
Maybe I should post this question at the "Indie Film & Documentary" forum?
The paperwork required to operate a standalone 501c3 will kill you. Plus, with the economy in the condition it's in now, non-profits all over are crumbling, because cash is in short supply and people aren't donating, as most need additional income rather than write-offs. That pretty much negates any benefit for establishing a non-profit entity right there, doesn't it?
If not, and you are intent upon operating under a non-profit banner, you would do better to find a sponsoring 501c3 entity, and setting up some other form of business entity for yourself. The International Documentary Association (IDA) has an on-going program for member filmmakers who wish to apply that allows them to function under the IDAs' 501c3. This program allows filmmakers to derive the benefits of a non-profit, but without all the hassle. Of course, there is a fee charged, which is a percentage of all funds donated to the project, and there is still a fair amount of documentation required, and also quarterly accounting, but it's just a fraction of what is required when compared to establishing a standalone 501c3.
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Thanks, I do know about fiscal sponsorship and have researched that possibility extensively. However, I realized it may be a good idea to consider the option of establishing my own not-for-profit.
I don't think that the current economy and having to deal with lots of paperwork should be the only deterrents. The economy will certainly change. If that were the only reason, why start a production company at all, with the entire film industry hurting?
In addition, I can't predict how generous or not people can or will be, but I do know if someone believes in something, they find a way to contribute -- whether with cash or in-kind donations to the production. I would request donations on a project-by-project basis (a filmmaker I know just raised almost all the money she needs for her film by circulating a letter to everyone she knows and receiving donations - and she is for-profit, and unable to offer tax deductions for donors). My company would also be eligible to apply for grants that are not available to individuals, if it were not-for-profit.
Anytime you start investigating this structure the first thing anyone tells you is there's a lot of paperwork. I'd like reasons for or against going non-profit beyond the desire to avoid a lot of paperwork! I'm not totally sold on the idea, so I want input. My concerns are more about managing a not-for-profit, having a Board, hiring yourself out to do work on projects other than your own, can the owner also be the non-profit's manager, and so on.
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.
Magnetic Image, Inc.
Diana, I would like to know the answer to your question too. Did you get any clarity? What did you decide?