Widgets and the Arts
The widget inventor sells his design to a manufacturer. Widgets are produced and offered for sale. Lots of people buy them, and everyone makes money. But what if people really want, value and esteem widgets? What if widgets are deemed essential to civilized society, but few individuals can afford a widget of their own? Widget inventors would be discouraged from creating or producing widgets. Widgets would cease to exist. Can’t the public figure out a way to support widget creators and make widgets available to everyone?
Public policy favors the arts, science, religion, education and specialized intellectual pursuits that, theoretically at least, cannot flourish in a profit-driven economy. The creator (that is, the artist or researcher) cannot charge sufficiently for his or her product to be self-sustaining, in the same way that a manufacturer of consumer goods can. There may not even be a product to “sell,” but only an idea or the structure of ideas. Nevertheless, the work is deemed valuable to the public good. To advance the pursuit of these activities, to support artists and to encourage the development and dissemination of ideas, the law created the not-for-profit corporation.
Business corporations are “artificial persons” created by law for the sole purpose of making business run smoothly. Corporations have perpetual life (they do not cease to exist when a shareholder, or even all shareholders, die); they protect the individual shareholders from liability for acts and debts of the corporation (with certain limited exceptions); and they contribute to the public good by paying taxes.
The not-for-profit corporation is also an artificial person, with limited liability and perpetual life, but it is created in and for the public interest. It is granted advantageous tax status and may apply for the right to promise tax benefits to those who support its purposes with donations, grants and other types of funding. The catch is, the not-for-profit corporation is subject to public oversight, to make sure that the corporation pursues its not-for-profit purpose. In other words, while the not-for-profit corporation can make a profit, such profit cannot inure to the benefit of an individual.
Unlike a business corporation, which can be owned by just one shareholder, the not-for-profit is not “owned” at all, by anyone. It is operated by a board of directors, usually a minimum of three. It can pay salaries, but it cannot distribute profits. It must be prepared to demonstrate that income is used in furtherance of the corporate purpose. Any indication that funds are channeled through the not-for-profit corporation to benefit an associated business or an individual, even a board member or employee, will provoke investigation. The corporation is subject to scrutiny by state and federal governments, and by private contributors and oversight bodies such as accrediting groups.
To maintain the corporation’s tax advantages, the operation of the not-for-profit corporation must be transparent. “Self-dealing” is suspect: board members can be held personally accountable for violating their “fiduciary duty” to the corporation and to the public if they or their family and friends derive personal benefit from the corporation. Commingling of income between the not-for-profit corporation and any other entity is not permitted. The consequences of failing to live up to the very high standards imposed on the not-for-profit include loss of previously granted tax exempt status under Section 501(c)(3) of the Internal Revenue Code, denial of such exemption, criminal charges if fraud is suspected, and perhaps most important, loss of public trust.
So can I get donations and grants, and still run my business the way I always did? Maybe.
It is possible for your studio to develop another income stream from donations and foundation support, so long as you can establish and pursue a genuine not-for-profit purpose. Just beware: creating a not-for-profit corporation solely to benefit your business corporation or its shareholders is asking for trouble.
If you are contemplating going nonprofit, get the advice of professionals and check in with the agency in your state charged with overseeing charities.