Private Sector Blog Salon: Does the 501(c)(3) Remain Top Model?
Posted by May 16, 2011 4 comments
Here we all are, still in the trenches despite the recession, still searching for sustainable solutions.
Some say the 501(c)(3) model is broken while others claim it’s the economy, not the nonprofit business model, that’s broken. One thing is certain: change is the only constant. The lines between nonprofit and for-profit are definitely blurring. What do you think?
Is the 501(c)(3) model still working well for your organization? And for emerging artists, is the 501(c)(3) model still viable for what you hope to achieve or might another model better serve your vision?
Let’s take a look at some of the newer options that our experts will be debating in this week’s private sector blog salon.
First of all, the 501(c)(3) nonprofit business model is a perfectly viable option for some arts organizations where the infrastructure helps rather than hinders creativity and innovation - and so long as the charitable deduction remains on the tax laws.
Contract for services is basically a for-profit model where the arts organization contracts for the use of a facility and services or vice versa.
For newer, smaller organizations or independent artists without nonprofit status, fiscal sponsorship can be a solution. Fiscal sponsorship is where a legally recognized 501(c)(3) provides limited financial and legal oversight for a project initiated independently by an artist or an organization. The sponsorship provides eligibility for the project to solicit and receive grants and tax-deductible contributions through the sponsoring 501(c)(3) organization.
The arts incubator is another service that existing 501(c)(3) organizations can provide for emerging artists. Instead of the ability to solicit funds, the legally recognized 501(c)(3) provides space, back office services and professional development.
The next model is the low-profit, limited liability company, or L3C. It is a hybrid of a nonprofit and for-profit organization designed to attract private investments and philanthropic capital in ventures designated to provide a social benefit. The L3C has an explicit primary charitable mission and only a secondary profit concern, but unlike a nonprofit, the L3C is free to distribute the profits, after taxes, to owners or investors. This model is currently legal in Michigan, Vermont, Illinois, Wyoming, Utah, Louisiana, North Carolina, and Maine (August 2011).
Certified Benefit Corporations (B corporations) are a new type of corporation which uses the power of business to solve social and environmental problems. B Corporations must meet rigorous and independent standards of social and environmental performance, accountability, and transparency. Their legal structure expands corporate accountability so they are required to make decisions that are good for society, not just their shareholders. This format is available in Maryland, Vermont, New Jersey, Virginia, and on the books for nine more states in 2011.
Our expert team of bloggers will be discussing the pros and cons of these models and providing examples all this week.
Does the 501(c)(3) remain top model?
I invite you to join the debate!
I think the real questio is why you are creating an organization - for profit but socially aware? Do a B corporation. Need those tax-deductible receipts for donations and know this isn't really a profit-making business? Do a 501 c 3. Doing a one time project? Consier a limited partnership.
Thanks for hosting this important conversation. I look forward to the comments of your fabulous experts.
As a setup to the conversation, I'm wondering if it might help to avoid the usual conflation of 'business model' and 'business entity' which seems to begin with your framing post. The 501c3, L3C, and other legal corporate forms are NOT models...they are business entities. They are among the last decisions an individual or group needs to make in defining the way their business will work.
I'm sure the issue will arise in the posts to come. But it's a rather essential distinction that seems like semantics, but actually can flummox an informed conversation on the subject.
Best of luck!
Andew Taylor is exactly right. There is great confusion between business models and business structures. The business model involves questions like, what do you do? How do you do it? What are all the various ways you bring in revenue doing it, and what is the ideal mix for your particular model? How do you bring the cost of your product and your prospects for revenue into balance? Many businesses start thinking they do one thing, and end up doing another based upon what works. We in the arts need to do the same.
Valerie Beaman's list of possible structures is very helpful - but it is striking that 3 of the six business structures depend upon the existence of a 501(c)3: fiscal sponsorship and arts incubator require a parent or pass-through entity. Is the real question what motivates people to do the work, and gives them the freedom to be nimble and to experiment? Is it profit or social service? Both businesses and nonprofits need to have both investors (who provide capital) and executors (who do the work). How doe these structures work differently for those two?
If the "experts" in our field are confusing such different things, then I really fear for the future of our theater community.