Nonprofit vs. For Profit, or Both?

This year, I will begin inviting guests to contribute articles to The Savvy Musician Blog from time to time.  Today’s post comes from Melissa Snoza, flutist and Executive Director of the Chicago-based Fifth House Ensemble.

By Melissa Snoza

I first became acquainted with The Savvy Musician’s David Cutler when he was doing research for his book. I was delighted to be able to contribute some of Fifth House’s experiences with creating a dual business model and board development, and was impressed with David’s willingness to reach out to organizations like ours nationwide to contribute to the resource he was creating. (The finished book is full of real-life case studies and practical, objective information – if you’re considering  a path in music, you should buy a copy, or 10 like I just did for our staff and board!)

In an article published in the Pittsburgh Post-Gazette, David mentioned the 5HE’s dual business model. When we formed in 2005, we created both a 501(c)3 nonprofit (Fifth House Ensemble) and an LLC for our private events business (Amarante Ensembles). Same folks, different purpose.

As a young group, we knew we wanted to provide a wide variety of services, including those that would serve the public good (performances, educational programs), as well as those that would help to keep us fed (weddings, private events). We formed both businesses at the same time in order to be able to keep these activities separate financially, and in order to be able to market them in completely different ways.

Since the article was published, I’ve been getting many inquiries from arts organizations both established and emerging about how and why we did this, wondering if the same model would work for them. Interestingly, in most cases the concern is less about the types of services being provided and the best business structure to manage them, and more about how to raise the most money in the shortest amount of time. Inevitably, those who began as a for-profit think that they will raise more from donated funds as a non-profit, and vice-versa.

My first question is always, “why do you want to do this?” A business structure is about the most effective way to manage the types of services you want to offer, so you have to consider what is a good fit for your goals, not just your bank statement.

If you are a performing arts organization that is committed to work in the public schools and bringing performances to underserved audiences, changing from not-for-profit to an LLC will not help you raise funds from venture capitalists, unless something changes about the services you offer. What will you tell them about their return on investment? And do the people you are serving have the resources to pay big bucks for what you do?

Conversely, if you are a for-profit company that has been successful selling tickets to shows, merchandise, and DVDs, and you are attracted to the extra money you think you will bring in as a non-profit but loathe paperwork, is switching to 501(c)3 status really a good fit? Given that you don’t want to be the one to do grantwriting, annual reporting, financial management worthy of public scrutiny, board agendas, and all of the other tasks that go into managing a nonprofit, you may end up paying staff a large part of the added revenue you would see from changing structures.

The only real reason to have a split structure (in my opinion) is if you have services that are distinctly different enough to warrant that. If there is overlap, not only is the purpose for your choice not clear, but you also risk running afoul of the IRS. I remember fondly the conversation I had with Mr. Botkins, the IRS agent who reviewed our 501(c)3 application, about how we had created these two entities for the sole PURPOSE of keeping for- and non-profit activities separate. The IRS doesn’t like seeing for- and non-profit organizations to be connected in any way, via common control (similar officers/managers), contracts, or other financial arrangements.

Know yourself, the type of work you want to do, your tolerance for paperwork, and the types of people you want to serve. Be realistic about how much you have the potential to earn or raise. If the structure you are considering isn’t a good fit for your services, don’t be tempted to follow what you perceive to be the greener pasture, or you may certainly find yourself out in the cold. The best way to get more green is to make sure that what you do is serving the people around you in the best possible way, which will inspire customers to pay for your work, or donors to support its creation.

The Chicago-based Fifth House Ensemble is a versatile and dynamic group praised by the New York Times for its “conviction, authority and finesse.” Fifth House’s innovative programs engage audiences through their connective programming and unexpected performance venues. Its mission is to tap the collaborative spirit of chamber music to create engaging performances and interactive educational programs, forging meaningful partnerships with unexpected venues, artists of other disciplines, educational institutions, and audiences of every type. For more information on the ensemble, visit www.fifth-house.com.

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