by : April 2016, Business, Featured Articles

The Non-Profit Dance

The Non-Profit Dance

Coverage of music industry news tends to follow, as this Journal does, the for profit sector. Corporate market leaders, like Apple, Spotify, and Live Nation, get special coverage on a regular basis. Not so the vibrant non-profit sector of public charities and private foundations, which remain largely unexplored in the music business literature.  Yet in the United States non-profits in the arts generate as much as $33 billion in revenue every year and support over four hundred thousand jobs. It is difficult to distill from there the value of music related non-profits without more detailed research, something that is urgently needed.  Nevertheless, a reasonable and conservative back-of-the-envelope estimate is to consider that one-tenth of the non-profit sector in the arts is tied is, directly or indirectly, tied to music.  The dollar value of the U.S. non-profit music sector could then approach  $3 billion, as much as the annual revenue of either the live music business or the publishing business.

The implication is that the non-profit music sector should no longer be just an afterthought in the music marketplace. Moreover, music business professionals, especially, should begin to unlock more value for themselves by paying closer attention to what the non-profit model is and how it is constituted — just as an introductory music business textbook considers whether a general partnership or a limited liability company is the best practical legal arrangement for a band.

In fact, a lot of the information provided below is not yet covered in the U.S. music business textbooks. Rather, it complements the existing literature. The topic is better covered in many developed countries in Europe and Latin America, where musicians have to scrape a living (or do better than that), especially with public money at a federal, state, or municipal level. The region of Germany, Switzerland, and Austria is perhaps the best example, but countries like Colombia and Argentina have local authorities that are actively engaged supporting the efforts of their musicians, and this is true in Bogotá as well as in Buenos Aires. Funding is usually at hand where music is acknowledges as a national cultural patrimony.

Starting A Non-Profit

Fundamentally, the non-profit model depends on tax-deductible donations and grants from exclusive foundations, like the National Endowment for the Arts. In the U.S., the Boston Symphony collected about $43 million on both counts in 2014. And whereas making classical music may not be the aspiration of contemporary musicians, artists in other genres deemed to have cultural or societal value, such as jazz musicians, could take a page out of The Boston Symphony’s book –- and its non-profit model.

In the United States, non-profit organizations are generally corporate entities organized under state law, founded by filing “Articles of Organization” with the local Secretary of State. While filing the articles of organization incorporates the entity, one of the hallmarks of a non-profit is its tax-exempt status. This requires separate IRS approval. While there are many kinds of tax exempt organizations, the focus here is on the 501(c)3,  as this is the most popular and the choice of most arts based non-profits.

To be eligible for 501(c)3 status,  the purpose must be “religious, educational, charitable, scientific, artistic, [to] test for public safety, to  foster national or international amateur sports competition, or [to prevent] cruelty to children or animals.”1 The application process normally takes six to nine months, and the guidance of a lawyer is recommended.

Moreover, when applying for 501(c)3 tax exempt status the founders of an organization must choose to apply as either a public charity or a private foundation. While both are tax-exempt, each carries a different set of regulations and tax benefits. Public charities enjoy more favorable rules with regards to charitable income and tax deductions, while private foundations are subject to strict behavioral codes. A rule of thumb is that charities perform charitable work, while foundations fund and support them.

Public Charity or Private Foundation

To become a public charity, an organization must “earn” public charity status. In order to qualify for public charity status — as well as keep it, as the status can be removed should the organization not continue to fulfill certain requirements — the charity must be organized exclusively for the purposes set out in its Articles of Organization and the IRS application. The charity must represent the public interest by having a diversified board of directors.  More than half of the board must be unrelated by blood, marriage or outside business co-ownership and not be compensated as employees of the organisation.2

Public charities must also pass an income test. To be granted public charity status, the organization must be “supported by the general public”. The legal requirement is at least 33% of revenues must come from donors who give less than 2% of the organization’s annual income. This ensures the organization is receiving sizable funding from general donations, instead of exclusively grants or large charitable contributions. In addition to these fundraising requirements, all of the charity’s assets must be used to benefit the public, and not for private use. Charities are also not allowed to devote substantial portions of activities to lobbying, or participate in elections.

For example, a music educator seeking to start an independent music institute would need to seek public charity status. Indeed, music schools, a classification that includes colleges, performing arts high schools, and independent educational programs, require the non-profit consideration to accept charitable donations for scholarships, for the endowment, and, generally, to assist in the execution of the school’s mission statement.

The default classification for a 501(c)3 is the private foundation. Most foundations choose this status intentionally. One of the most important reasons justifying the choice is control. Although there are stricter reporting requirements, and minimum annual asset distributions of 5%, private foundations can be controlled by related parties. They can also be funded by a select group of donors. Examples include the Bill and Melinda Gates Foundation, or the New England Foundation For the Arts.

Structuring the entity as a foundation allows the enterprise to focus on funding and supporting charitable work instead of operating charitable programs. Usually, musicians will not find wealthy donors to set up a foundation and support their music forever. In certain cases, however, the involvement of a foundation with a group of like-minded musicians can be continuous and generous to the point that it may not even be a problem. Boston Baroque, a Grammy nominated ensemble,  is dedicated to giving performances in period instruments. It has relied extensively on the Andrew W. Mellon Foundation and its Arts and Cultural Heritage Program. Starting with a $50K grant in 1989, Mellon awarded $100K in 1991, $150,000 in 1994, and another $125,000 in 1997. Other foundations and sponsors have since stepped in and paid for international tours, including the last trip in 2015 to the prestigious Beethoven festival in Poland.

This suggests that the non-profit arena is tapped continuously and that, regardless, there is a proliferation of donors. In the U.S., this is mostly private foundations rather than taxpayers.  These foundations don’t just write the check but provide support services. They can offer marketing and promotional help, legal advice, and offer free advocacy.

ArtsBoston, for example, offers promotional services for local performances, as well as half price tickets to its nearly two hundred member organizations. They are the medium by which the greater arts community coordinates and interacts. During the 2014 Boston Mayoral election, ArtsBoston partnered with MASSCreative, an arts-focused political advocacy organization and was able to galvanize the local creative constituents. This ultimately led to the creation of a cabinet level arts/cultural position, as well as increased city arts budgets and staffing.

Smaller organizations such as the Arts & Business Council/ Volunteer Lawyers for the Arts provide services to individual artists. These include training sessions on everything from marketing to intellectual property law, and free or reduced legal services for artists.

Overview

Understanding the use and benefits of a non-profit status is important for U.S. musicians. Certainly, even if well justified, procuring non-profit status is more complicated than starting a general partnership or a limited liability company. None of this will probably matter to a performing musician that is intending to be a sideman or a featured commercial artist.  As explained, it could have implications,  especially if a change of heart leads to the consideration of a career in music education.

For that matter, every musician should be aware of the huge and dormant potential of the myriad foundations that support non-commercial efforts in the arts, including music. The market of both private and public money for special art projects is, as was suggested at the beginning, enormous. The irony is that many U.S. musicians tend to have a vibrant and rewarding interaction with the commercial music market. Theirs is the only story that gets told.

In short, non-commercial musicians ignore at their peril the private and public sources of funding outside the music mainstream.  The solution for access is, to some extent, obvious. Many of the non-profit foundations that are interested in helping the arts are listed, with their full mission statement, in public records. These are available online, but it probably helps to find a centrally located library and get some assistance from the librarian—a low-tech approach that can yield quick dividends.

 

By John Lahr


Endnotes:

1. IRS Publication 557, https://www.irs.gov/pub/irs-pdf/p557.pdf

2. Mcrae, Greg. “Public Charity vs. Private Foundation.” Foundation Group. N.p., 28 May 2015. Web. 15 Feb. 2016.

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Comments

  1. Jene'e Patitucci says:

    Thank you so much for this article! As a student with Berklee Online studying Music Business, I hope to start a Nonprofit Musician Resource Center, and have found the lack of attention to the Nonprofit sector very frustrating.

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