Not-For-Profit Corporations: The Control Factor
Rule Number One: No one is going to make a donation if it isn't tax deductible.
It is public policy to encourage private charity by granting tax benefits to qualified entities. Gifts to such entities are tax deductible by the donor. The theory is, without the incentive of getting a tax deduction, no one is going to make charitable gifts. Proprietary, for-profit institutions (privately owned and operated) in general have less credibility than charitable institutions, and none at all for purposes of fundraising or applying for grants or accreditation. Even the panhandler working the long line in front of a blockbuster museum exhibit knew enough to say he's a "501(c)(3)"!
It is not difficult to incorporate as a "not-for-profit", nor should it be terribly expensive. Your lawyer has access to legal services that form corporations almost overnight, and she shouldn't need to charge more than an hour or two of time to hold "the first meeting" to set up the corporation. Your accountant shouldn't find it burdensome to complete and send in the requisite forms, or to show you how to do it. Spend your money on professional help with the application for tax-exempt status. You can do it yourself, but the form is complicated and confusing, and the result is too important to risk. So everyone agrees that not-for-profit is good, right?
Well, here's the downside: control.
A regular business ("C") corporation is owned and controlled by shareholders: directors are elected to a board by the shareholders and serve at their pleasure. By contrast, no one "owns" a 501(c)(3) corporation: the creators of the corporation form a board of directors. It is this board that has responsibility for the operation of the corporation; the directors, in their discretion, may hire an operating officer, administrator or even a clerk to answer the telephone, or they may run the business themselves. All employees, from chief executive officer on down, are subject to the directors' oversight. Which means that anyone can be fired by the board, even the founding artistic director, whose name on the letterhead is intended to draw professional respect, public interest and, of course, lots of donations.
How can the board and the business become adversaries?
Easy, and it happens often. Artistic integrity and financial stability may be inconsistent if the artistic vision conflicts with the board's focus on the "bottom line". For example, if the board members are worried about paying rent or employment taxes, they may be less sympathetic to demands for new costumes, or the hiring of the newest international star. A more basic problem is that members of the board may honestly disagree with the artists' aspirations for the future of the institution. On the other hand, board members, under constant pressure to "give, get or get off", pay for the right to take control. If they give money, they can give their opinions, and the more they give, the more influence they may try to exert.
How can the institution be protected from well-meaning board members?
The incorporators of the not-for-profit entity must seek and accept wise counsel as to the formation of a board. Choose members who are sympathetic to the goals of the incorporators; amend the bylaws, if necessary, to keep the board sympathetic; limit the size of any one member's donations; don't apply for funding, grants or connections that may tend to interfere with the freedom of operation. It may not be possible, however, to keep the board small and malleable, because granting institutions often have criteria regarding the size, composition and diversity of boards of directors.
Public oversight is unavoidable, as well. The law sets high standards for not-for-profit corporations, and protects the public from unscrupulous, or even just careless, board members and corporate officers. The federal government requires annual reporting; annual, audited statements are required by many states. Self-dealing or other impropriety, or the appearance of impropriety, will be scrutinized, and may result in the loss of the corporation's favorable tax status. Any member of the public may file a complaint with state or local charities bureaus, and there is always a risk of negative publicity. The integrity of the institution is the only real asset of the not-for-profit corporation.
So, is it worth risking control of the business you've created? Speak to your lawyer, your development experts, your accountant and your children, for whom you built the business in the first place.