by Jeff Thompson
“Oh! An article about the tax implications of various business entities, this is the type of article that improvisers are dying to read,” he said to himself, unaware of his self-delusion. I nerd out about this stuff and I have helped lots of actors, writers, and other creative professionals decide how to properly structure their businesses from a tax perspective.
What is A Non-Profit?
When it comes to theaters and festivals, the big question is always “Should I be a non-profit company?” Let’s first clarify what a non-profit 501(c)3 company is not:
- It is not a company that cannot make a profit. There are many profitable non-profit companies (I’ll explain this weird oxymoron in a bit).
- It is not a company that has to give any profits that it makes to charity or distribute it to it’s members at the end of the year (there are different types of 501(c) organizations, but the 501(c)3 is the type we’re talking about – we don’t really have time to get into the rest of them).
- It is not a type of organization that guarantees that you’re going to be getting hundreds of thousands of dollars in grants your first year in operation. It just makes you eligible to apply for them. Big difference.
So, what is a 501(c)3 nonprofit organization? It is a corporation that is formed within a US state whose sole purpose is some public benefit and whose profits will not benefit any specific individual or individuals. In a regular company, if you own the company the profits of the company are yours to keep and you’re taxed on those profits. In a nonprofit company, you can’t just take out the money from the company whenever you feel like it. That’s super illegal and that’s when you’ll get a call from the Attorney General (or Attorneys General if you’re operating in multiple states). You can pay yourself a fair salary though!
Why Would I Want to Be A Non-Profit?
The big draw? You don’t have to pay income taxes. That’s hella cool. You make $20,000 in profit and not one cent of that goes to the IRS. Screw you, Uncle Sam! You still have to pay payroll taxes to your employees, property taxes on property you might own, and sales taxes for any items that you might sell (and if you run an unrelated business under your non-profit, you will be taxed on that income), but you are still mostly exempt from Federal, State, and Local taxes. Cool!
Also, it makes you eligible for grants! Now, grant writing is a whole art in-and-of itself, so we won’t go into details, but there are private and public organizations that are looking to support organizations potentially like yours!
Also, donations! Now anyone can donate to any company you want. You can technically just send Jeff Bezos a check for $1,000 and call it a donation, but only 501(c)3 organizations can receive tax-deductible donations, so come tax-time your patrons can try to itemize their donations on their taxes and get those sweet, sweet tax refunds.
Why Wouldn’t I Choose to Be A Non-Profit?
Do you like paperwork / can you hire a lawyer or accountant to handle the paperwork for you? In order to become a 501(c)3, you must file a Form 1023 with the IRS and pay a $600 (or $275, depending on the size of your organization) application fee. You will also have to form the company at the State level, request exemption at the State level, and sometimes register with an additional governing body (for example, CA requires charities to register with the Office of the Attorney General in order to solicit donations), so you can very easily find yourself spending $1,000 or more just to form the organization.
Also, what happens if you want to pay yourself? As a board member of the non-profit (non-profit organizations don’t issue stock, so they don’t have owners), if you are managing the day-to-day matters of the company you are an employee, which means you can’t just write yourself a check and call it a day. You have to run payroll and do all those fun withholdings (you know all those random taxes and such that get taken out whenever your employer pays you), which might mean hiring an accountant or just getting real familiar with QuickBooks. It’s not something that people are often ready to deal with.
So, I Should Be a For-Profit Festival?
I mean, maybe? If you’re doing it by yourself and you know you’re going to be investing a lot of your personal funds, then you get to write off the loss personally in the years that you’re running the festival. And if you make a profit, you will pay taxes on it, but you don’t have to do any fancy paperwork to put the money in your bank account.
If you have multiple partners (in a business sense, not a romantic sense), then you’ll have to form a partnership (or perhaps even an LLC or corporation), which does mean more paperwork to make sure everything is divided and accounted for properly, and there are various tax implications involved in that decision as well.
Just Tell Me What I Should Do, Jeff!
Nah, I’m a man of mystery. But also, it really depends on what YOU want to do with the festival.
- Are you and your business-minded friends planning on producing a festival for profit that you’re wanting to grow into a large business where you produce several festivals nationwide? Maybe the LLC or C-Corp is your best bet.
- Are you by yourself just wanting to have a reason to invite amazing performers from all around the world to your hometown and maybe make a little money on the side? Then you’d probably just want to be a sole proprietorship (i.e. the default business model if you haven’t registered your business as an LLC or corporation)
- Does your festival have a charitable purpose or one that benefits a specific population and are you looking for support from larger organizations (in the form of grants) or corporations (in the form of donations or sponsorships) to help support that purpose? Then the nonprofit might be best for you.
It’s important to have a vision for how your festival will grow and ultimately what you want from it. This will help you decide on the best format to start with. And if things change as the festival grows over time, just know that you can adopt a new format later in the festival’s life.
Good luck and happy producing!