FROM TC:This week, Americans For The Arts is holding an online 'salon', inviting commentary from experts about the future of the not-for-profit business model.  Here are some initial excerpts:


Commentary: Does the 501(c)3 remain the top model for the arts?

Valerie Beaman, 5/16/11

Some say the 501(c)3 model is broken while others claim it's the economy, not the nonprofit business model, that's broken.  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: 

         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, fiscal sponsorship can be a solution -- a 501(c)3 provides limited financial and legal oversight for a project initiated independently by an artist or an organization.

         The arts incubator is another service 501(c)3 organizations can provide for emerging artists. Instead of the ability to solicit funds, the 501(c)3 provides space, back office services and professional development.

         The low-profit, limited liability company, or L3C 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.  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. This format is available in Maryland, Vermont, New Jersey, Virginia, and on the books for nine more states in 2011.


Commentary: The L3C Cha-Cha-Cha

Diane Ragsdale, 5/16/11

Arena Stage in DC, began as a for-profit corporation by selling shares to 300 Washingtonians.  Zelda Fichandler founded the theater in 1950 as a profit corporation in order to better maintain control of its artistic policy, and the theater became a nonprofit years later in order to become eligible for gifts and grants, especially from the Ford Foundation which entered the field that year:

"[...] we made all of our expenses at the box office for roughly the first fifteen years of our existence. It was as late as the mid-sixties when we conceded that we couldn't continue to do this, but had to become a deficit-producing organization.  I bring this up simply to point out that, while...indeed, without the nonprofit income tax code, our American theater would simply not exist, being nonprofit does not really define us -- our goals, our aims, our aesthetic, our achievements. What defines us, measures us, is our capacity to produce art."

I've been wondering lately what the resident theater movement would look like today if, in the mid0inh century, theaters had the option of becoming L3C corporations instead of nonprofits. Would L3C have been a better fit?  How many organizations became nonprofit only to become eligible for gifts and grants?  I'm by no means suggesting all or even most cultural institutions should become L3Cs. But this much I know: in order for the L3C model to work there will need to be both cultural entrepreneurs and those (private and public funders) willing to put in the risk capital.  I'm confident we have cultural entrepreneurs; but do we have those willing to embrace this new model and invest in them? I hope so; because it's going to take two daring souls to do this dance.


Commentary: Revenue means more than business models

James Undercofler, 5/16/11

Why, why are arts organizations being advised to research models other than the 501(c)3? It's vitally important to analyze the reasons behind this "movement" in the arts and culture sector.  The changing nature of philanthropy surely plays a central role. Reduced contributed revenue from government, foundations, and corporate entities has placed increased pressure on individual giving AND earned revenue. These latter two elements tend to work in opposition to each other, in that increased pressure on individual giving generally leads to more less-informed board members who require attention, while the need to increased earned revenue requires a fleet-footed executive team.  Increasingly the board becomes an obstacle, not an enhancement Additionally, individual giving has become highly transactional. Donors see themselves as investors. They demand predetermined, program-specific outcomes for their investments.  Again, this places double pressure on management: no relief from general operating expense pressure, but adding administrative cost at the program level (The L3C, in its hybrid construction, confirms the philanthropist-cum-investor in its capital formation).  So evolves a conundrum, a puzzle - so we look for new organizational models that will solve our problems.  Unfortunately, organizational models cannot fully solve these problems.  In the end, the bottom line: net revenue, whether earned or contributed, and the need and size of capital expense will play the more significant roles in determining the most effective organizational model.


Commentary: Questioning old dogmas, in the U.S. and the U.K.

Colin Tweedy, 5/16/11

Charitable status can, at times, seem like a dead hand squeezing the life blood out of many arts bodies, with risk-adverse boards marginalising the paid management. The founding fathers of both United Kingdom and United States charitable law would never have envisaged thousands of arts organisations registering as charities. Of course, arts organisations want to receive philanthropic gifts and there are mechanisms by which this can be achieved. But do the financial benefits of reduced rates and tax outweigh having an employee-owned business with the stimulus to generate real profits to reward colleagues and to plough back funds into the artistic endeavours?  Many of the worthy men and women who sit on boards of arts organisations have little if any of the skills necessary to help the organisation achieve its artistic goals or financial security. Surely governance is more than being an unpaid fundraiser? Also, we have to break down the prejudices that so be-devil the charitable sector generally of "public sector good, private sector bad." Profit-making should not compromise artistic creativity - they are not contradictions in terms.  Internationally, we are seeing a generational change where arts practitioners are not interested in the "arts for arts' sake" model and are looking for a more entrepreneurial approach. Nonprofits must stop being automatically translated into charity. An arts organisation that says it is "nonprofit," does not mean it is not interested in profit.  The arts must no longer be hampered by its legal status as charities, to exploit its products in the market. It is time to question old dogmas and allow new models to perform centre stage.


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FROM TC: The commentary below, while not part of the AFTA blog above, is also on topic:


Commentary: A sustainable business model for the performing arts

Brett Fisher, Pepperdine University's "Graziadio Voice" blog, 5/16/11

The non-profit [has] two products: tickets and donations.  One product became less popular in 2007; donations. No new products were in the pipeline.  This presents sustainability issues.  In my previous article, we explored how when assets are utilized at peak capacity, they generate (hopefully) sufficient revenues.  How can we combine top performing assets with an antiquated non-profit performing arts business model to produce a long-term sustainable model for the performing arts?  We bundle top performing assets with complementary products to the arts.  Where are the arts usually found?  In a community.  If we combine these complementary products with the highest performing asset, intellectual property, we can take the model even further.  This idea is not a new idea by any means, it's just not scalable yet.  Here is an example of a sustainable mixed-use community that was created in Ventura, CA:  Working Artists Ventura (WAV) was the brain-child of Chris Velasco, President of PLACE (Projects Linking Art, Community, and Environment).  PLACE is working on developing the "next generation" of sustainable communities, which builds on the WAV concept, but takes sustainability even further.

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