The Control Factor
“The Control Factor”
By Dena Simone Moss, Esq.
“They” say that I need to be a not-for-profit corporation if I want to be taken seriously as an arts institution.
You’ve done your “due diligence”. You’ve consulted your accountant, your lawyer, your friends who are performing arts professionals. You have heard ad nauseam that privately owned and operated (“proprietary”) schools and companies aren’t eligible for funding and can’t effectively solicit donations. You have been advised that not-for-profit corporations are subject to governmental oversight and are required to file audited statements every year. You understand that ultimate authority will be vested in a board of directors, which can hire, and fire, any employee, including the executive director, chief executive, chief financial officer. You’ve been warned that proprietary institutions have no credibility as arts organizations and that the only way to take your school/studio/company to the next level is to go non-profit.
You are aware that your position will change, even if you accept an attractive salary and prestigious title. You may not even be allowed to serve on the board. Profits (and not-for-profit corporations certainly can, and should, make a profit) cannot be distributed, but must be reinvested in the corporation, although salaries can be increased and bonuses can be awarded.
All of which is true (except for the credibility issue, which may or may not be true). So the question really is whether the possibility of developing an income stream from grants and donations is strong enough to justify surrendering control of a successful business to an unknown quantity, the board of directors.
There must be a way to have the best of both worlds.
While there are legal pitfalls, you can operate under two corporations: retain the tuition-driven and fee-based part of your business as a regular “C” corporation; and create a second, 501(c)(3), corporation for non-income producing programs such as a performing group, or scholarship and outreach programs. Such programs will generate the “buzz” necessary to grow the regular corporation and may even become self-sustaining through public support.
The legal pitfalls of operating under two corporations are commingling, self-dealing, and the appearance of impropriety. Since the non-profit corporation has legal privileges, like exemption from taxation, it also has stringent legal obligations. You can’t run the not-for-profit to benefit the shareholders of the regular corporation. You can’t be in the position of benefiting yourself by some act of the not-for-profit. You can’t “commingle” receipts: donations and grant money must be kept separate from income generated by the “C” corporation. For example, the not-for-profit can pay rent to the regular corporation for the use of rehearsal space, but the amount of rent must be justifiable according to the current rental market. You can’t pay employees of the regular corporation from the not-for-profit operating account. Salaries paid to employees of the not-for-profit who may be shareholders of the regular corporation must be reasonable. Any payments at all to shareholders of the regular corporation by the not-for-profit are vulnerable.
Maintaining two parallel businesses is doable, legally and practically, as long as you are willing and able to maintain transparency and scrupulously clean books and records…and ready to “let go” at least a little.