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Non-profit or LLC

About to meet with a lawyer to set up my new community choir organization.   Has anyone else incorporated as an LLC? Is it easier to receive grants if you are a non-profit?  Are there other concerns?
 
Any insight would be appreciated.
Replies (12): Threaded | Chronological
on October 27, 2011 11:06pm
Why on earth would you consider an LLC? Every community chorus that I have ever heard of that has incorporated has done so as a non-profit. You want donations to be tax deductible: non-profit. You want to be able to obtain software legally and very inexpensively through TechSoup: non-profit, etc.
 
I have done two choruses as non-profit and never needed a lawyer.
 
Bill Paisner
Director, Southwest Womens Chorus
on October 28, 2011 1:59am
We are going through the process as we speak. Doing the 501(3) non-profit. It is my understanding that you cannot receive grants/special funding if you are something other than a non-profit. Had to incorporate in the state of VA first before filing for the 501(c)3. I have a steering committee doing all the work (thank goodness!)...they are now the functioning board.
 
Here is the organization they are using for the set up process:  http://501c3.org/  (a LOT less costly than using a lawyer and from what I've been told, a joy to work with)
 
Hope this helps...good luck!
 
Michael Main, Artistic Director
The Arts Chorale of Winchester
 
on October 28, 2011 4:10am
Hi Jack - being a 'not-for-profit' allows donor's to a tax deduction for charitable giving . . . big donor's especially.  Can't do that as a LLC.
 
Good luck,
 
Bill Adams
Fort Bend Boys Choir of Texas
on October 28, 2011 9:19am
Only if you also have obtained Federal tax-exempt status; just being a registered nonprofit is not enough.
on October 28, 2011 6:04am
Hello Jack--I worked for many years, off and on, in the nonprofit sector, and can tell you that it is IMPOSSIBLE to seek and receive grant funding in the arts if your organization is NOT a tax-exempt, nonprofit entity, most commonly with a 501(c)(3) tax-exempt designation as a charitable arts organization.  Here's a good link:  http://www.legalzoom.com/nonprofits-guide/non-profit-llc-corporation-comparison.html
 
You will first need to register your organization as a nonprofit corporation with the appropriate state government office.  It may be helpful to have a lawyer involved, but is not necessary; it is entirely possible to seek Federal tax exempt, nonprofit status without paying a lawyer.  The process is not quick, but relatively easy.  It can take weeks to months to receive a "final determination letter" of Federal tax exempt, nonprofit status after applying, so one should get started as soon as possible if you wish to seek grant funding, although I believe that Federal tax-exempt status is granted retroactively if you file for such within a certain amount of time after registering your nonprofit corporation with the state.  You will need to have several pieces of information on hand before applying, and several organizational characteristics in place.  I suggest that you Google "apply for federal tax exempt nonprofit status" and read more about it.  There is a wealth of information out there online, as well as good books on the subject at the library.  Here is just one link: http://www.nolo.com/legal-encyclopedia/nonprofit-tax-exempt-status-501c3-30124.html
 
For helpful information about grant seeking in general, I strongly suggest that you visit The Foundation Center's website, especially their FREE online tutorial on grant proposal writing:
 
 
You should know that grant funding is not easy to obtain, particularly in the current economic climate, and that you and your board of trustees/directors should be prepared to develop a comprehensive fundraising plan that includes seeking support from individual donors via one-on-one "asks," special events, concerts, etc.  The three major categories of donors are individuals, foundations (private and public), and corporations.  There should also be a book in the main branch of your local library that lists all the grantmaking foundations in your state; they are often called "The (your state) Foundation Data Book."  This information is also usually available online, as well, but last time I looked they charge a fee for online access or a CD. 
 
It would be a good idea to seek the advice of a similar group in your town/city that has successfully applied for and received tax exempt, nonprofit status, and knows how to navigate the nonprofit world, particularly in the realm of fundraising, in your location.  I would also be happy to try to answer specific questions if you would like to email me privately, if our back-and-forth would not be of general interest.
on October 28, 2011 9:17am
P.S.  Also start checking with your local arts council and other "support the arts" organizations, and your local colleges and universities, to find out if they hold/sponsor seminars on nonprofit fundraising and/or grant proposal writing.  These can be invaluable, especially to nonprofit newbies.
 
As an aside about grants:  You should also be aware that grant funding is exceedingly rare or impossible to obtain for salaries and other general operating expenses, and is only typically available for things such as equipment, supplies, special projects, and so on.  ALL grantmaking foundations will expect that your organization will have the funds in hand, or be able to obtain the funds, for general operating expenses, if any (salaries, rent, utilities, insurance, etc.) from OTHER sources.
 
It is also extremely rare for ONE grant to cover the entire cost of any one need or project; you must be prepared to cobble together enough money from many sources in order to meet any need, and you can NEVER count on receiving grant funding for any need.  In grant proposal writing monies obtained from other sources for a particular need are called "matching funds" when you are applying for grant support ("in-kind support" also counts here), and I can tell you from long experience that if you have these funds in hand or firmly pledged from other sources BEFORE you write grant proposals in hopes of receiving the balance needed, your proposal is more likely to succeed and be at least partially funded (yes, you can receive less than you are asking for, too, if your proposal is successful).  Anything you can do to PROVE to a grantmaker that you have substantial community support (and I mean the cold, hard cash kind of support) for your organization will help you succeed in grant seeking.  
 
Finally, be sure to carefully read each grantmaker's guidelines before approaching them.  Oh, there is also a substantial lag time between the time you will submit a grant proposal (meeting their deadline) and the time that you will receive any grant funding, if you are chosen to receive a grant; this lag time can be anything from a few months to up to a year, so you need to plan far in advance when seeking grant support for any need.  Grant funding is not a fast source of support.
 
Finally, if I have told you things that you already know, please forgive my presumptuous-ness.  From your initial query about whether it is easier to obtain grants as a nonprofit, I assumed that you, like most people, simply do not know about the fundamental "other worldliness" of the nonprofit sector, and how substantially differently it works from the for-profit sector. 
on October 30, 2011 3:43am
Thanks to everyone for the advice.  The reason I was thinking LLC was that I would like to create multiple organizations in multiple markets. All will of course be self-sustaing and profitable and I will be able to retire at a relatively young age ;).  More realistically, if the current trend toward less government funding for the arts continues and the level of personal donations continue to spiral downward isn't it possible that non-profit music organizations are headed for extinction?  If one believes the rhetoric from the political right, our nation is headed for a time of government austerity.  The only place that both parties seem to agree on is that small businesses drive the economy.  Because of that mutual perception, tax advantages and programs to help small business and the individuals that run them are likely to grow while support for the arts will continue to wain.   If a flat tax is implemented, there will no longer be a tax incentive for individuals and corporations to make charitable donations to the arts.  Organizations that depend on those donations would be doomed to fail. 
 
If as Julia says, grant money can not be found to cover general operating expenses or salaries and the fact that grant money is increasingly rare,  depending on the generosity of the government or corporate donors seems a shaky premise to start a business.
 
With the changes coming to licensing cover songs on YouTube a whole new market is about to open up for advertising revenue.  Currently one can not use pay per click advertising on YouTube if you have copyrighted material there that does not belong to you.  If the licensing agreement with Harry Fox agency turns out to be compulsory and not dependent on view count, music organizations that produce viral videos could potentially make a profit.  There are already YouTube channel directors that make a comfortable living from advertising on their channels.  Why not music ensembles organized as a business rather than a non-profit?   
 
 
...but in the real world, 501 (c)(3) sounds like the right way to go. 
 
edit:  I responded before looking into the links you all provided.  This is why I love ChoralNet.  Wow, amazing, thank-you all for the unbelievably useful resources.  
on October 30, 2011 7:07am
There is a saying, no doubt borrowed and paraphrased from another source, that goes like this:  "When the economy gets a cold, the nonprofit sector gets pneumonia."  Well, what happens when the economy gets pneumonia?  You can imagine...
 
Nonprofits of all kinds have been closing their doors permanently for some time now, unable to generate enough support to fulfill their missions.  Only those community-based nonprofits having the strongest, most consistent levels of local support have been able to survive, and even they are teetering on the brink.  How many symphony orchestras in the U.S. have disappeared in the past decade alone?  I shudder to think. 
 
Now, what I'm going to say was true when I left the nonprofit sector some years ago, and laws change all the time, so don't take any of this as gospel but do research it all on your own for the most up-to-date information.  You ask, "Why not music ensembles organized as a business rather than a non-profit?"  There is no legal reason why such a thing cannot happen, and indeed there are a number of "professional" choral ensembles out there who generate income from ticket sales, CD sales, and etc.  But these organizations are unable to seek tax-deductible donations from individuals, corporations, and foundations, and so must rely on typical, "for profit" strategies to survive.
 
I want to try to clear up one very important point that most people both in and out of the nonprofit sector do not understand, simply because of the unfortunate term "nonprofit."  That is, (as of the time I left the nonprofit sector) there is no legal or ethical barrier that prevents a nonprofit organization from making a profit!  That's right, nonprofit organizations can legally, ethically, and morally make a financial profit from their mission-related activities, it is just that these profits cannot be used to enrich the trustees or other principals of the organization, and must be used in ways that directly further the organization's mission, its reason for existing, the legal description of its activities that are meant to benefit the community. 
 
It is entirely appropriate for any profits to be spent on anything that contributes to the successful fulfillment of the mission.  Profits can also be placed in a "reserve fund," a rainy-day fund that is put in place for future needs or emergencies.  A nonprofit, however, cannot engage in just ANY random activity to raise funds and try to generate a profit; all such activities must be directly related to the organization's mission.  Any profit-making activity that falls outside the mission is treated very differently, both legally and otherwise, and professional advice must be obtained here (YouTube advertising--clicks for cash--viral videos--probably all fall into this non-mission-related area).
 
So, let's say that a miracle occurs and your choir actually makes a profit one year, that your income is higher than your budgeted expenses.  You could use those profits to purchase more music, rent a larger performance venue, purchase choir robes, pay an accompanist, ANYTHING that is directly related to the successful furtherance of your choir's mission.  You could place all or some of them in a "reserve fund" from which to draw for future needs or unexpected expenses. 
 
Again, please check to make sure everything I have said here is still true; laws do change and the nonprofit sector as a whole, and especially the largest entities within it, such as nonprofit hospitals and national philanthropic organizations, is under increasing pressure to prove and defend why it should retain its privileged (as viewed by many in the for-profit sector) tax-exempt status in times of shrinking tax revenues. 
on October 30, 2011 8:37am
Government grants aren't a significant funding source, except for a handful of biggies. If the austerity in Washington succeeded in eliminating all support for the arts, it would hurt the NY Philharmonic and headline groups like that, but have little effect on most choirs. And although there are corporate and foundation grants available, they are usually supplementary to a choir's budget. 
 
The principal source of funding for most choirs (beyond ticket revenue and CD sales) is individual contributions from real people, and those aren't as much affected by ideology. And although there's no reason that individuals can't give contributions to a choir whether it's non-profit or not, most donors feel more comfortable giving to a 501(c)3, which allows them to deduct the contribution on their federal (and usually state) taxes. That's the primary reason to get a 501(c)3 determination letter (although there are other advantages, such as exemption from corporate income tax, discounted rates from newspapers, and so on. My choir gets a free website from Dreamhost for being a 501(c)3. ). Even donors who don't actually itemize deductions prefer nonprofits because they feel their contribution is supporting the arts, whereas in a regular corporation their donation is perceived as lining the owner's pockets. (The truth is a little more blurred than this, but this perception affects donor's attitudes.)
on October 30, 2011 9:03am
Yes, and this is why nonprofit board members MUST step up to the plate and get comfortable with and proficient at asking, face-to-face, supporter-to-potential supporter, for substantial financial contributions to the organization.  This critical responsibility of board members cannot be overemphasized, particularly in today's economic climate, and there is no place for "chair warming" board members who do not take this responsibility seriously and work extremely hard at fundraising, continuously and enthusiastically.  No, not every board member can or will step up, and many will provide valuable assistance in other ways, but there must be at least some in every organization who are willing to do the face-to-face asks.
on October 30, 2011 8:51am
Even though federally tax-exempt nonprofit organizations do not have to pay taxes, they are still required to file a Form 990 with the IRS every fiscal year.  These reports detail the organization's income (by source of funds) and expenses (by category) and provide other critical information necessary for the maintenance of their tax-exempt status.  These forms are also public; that is, any citizen can ask to view any tax-exempt nonprofit's 990 returns at any time, and the organization must comply with the request. 
 
You can also go to GuideStar online and use their "basic search" to view ANY nonprofit organization's 990s, at least the most recent ones they have on file:
 
 
Viewing other nonprofit choral organizations' 990s might be a very valuable exercise for anyone who is considering forming their own tax-exempt, nonprofit choir.
 
 
on October 30, 2011 3:57pm
If a corporation sponsors a concert by providing banners that include the sponsor's company name and logo, do they do so as an advertizing expense or as a donation?  I am sure it could be either way but what have your experiences been?  If I solicit businesses to provide funds for production costs of YouTube videos in exchange for an ad placement at the end of the video, do you think they would claim it as an expense or a donation?  If my group was a for profit, couldn't the company still claim the expenditure as an advertizing expense? 
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