A singer who produces her own recitals. A group of colleagues who tour a chamber music program. A new concert series.
Any enterprise that generates income and expenses requires some kind of structure. Just how much structure depends on the scope of the work and the expectations for the project’s future. You might need to just give some thought to how you track your finances, or you might need to consider the long-term potential of your vision. There are several factors to consider when deciding among the available options: arranging for fiscal sponsorship, creating a limited liability corporation, or founding a nonprofit organization.
What Every Project Needs
Regardless of the type of project, the first step is to set up a separate bank account for all related income and expenses. Even if your business involves only your solo career, the separate account will make things infinitely easier come tax time, letting you readily sort out your deductible business expenses from the rest of your bills. For enterprises beyond your freelance work—such as a new company or recital series—the separate account is indispensable, setting a clear boundary between your own funds and the project’s. Keeping the funds separate also allows you to track the financial path of the endeavor, which can be one way to measure your success.
Fiscal Sponsorship: The Next Level
If you are launching a new entrepreneurial project, your first instinct may be to incorporate as a nonprofit. It seems logical. After all, if you’re starting a business, a business that is separate from your activities as a solo musician, then it makes sense to have it be its own entity. But thanks to the growing availability of fiscal sponsorship, you can have the best of both worlds.
Fiscal sponsorship is a formal arrangement between a project and a nonprofit registered under the 501(c)(3) section of the tax code, in which the nonprofit may accept grants and donations on behalf of the project. Because grant makers usually give to other organizations, not individuals, and donors receive a tax deduction only when they give to nonprofits, the arrangement greatly facilitates fundraising. Because it is relatively easy to arrange for fiscal sponsorship, it is a flexible tool that can be used in a variety of ways.
Even soloists can find a fiscal sponsorship relationship helpful. I have a colleague who once worked with a fiscal sponsor so that she could solicit tax-deductible donations for a new viola bow. When she met her goal, she left the arrangement. Fiscally sponsored projects can be of any length and scope, as long as you operate within the terms of the agreement. Usually these terms include a stipulation that funds raised through the sponsor have to be used for the purposes of the artistic project (you can’t fundraise for that Hawaiian cruise) and that you have to use specific language to describe the relationship when you start soliciting donors.
For many entrepreneurial artists, fiscal sponsorship is ideal. Being able to offer a tax-deduction in return for donations greatly enhances your fundraising success and provides your work with a stamp of institutional approval. Furthermore, working with a fiscal sponsor requires you to be more strict about accounting for your income and expenses, helping you get your project off to a professional start.
Fractured Atlas and The Field are two nonprofits with large fiscal sponsorship programs for artists. Fractured Atlas, which serves close to 30,000 artists from all over the country (including me), provides each project with a dedicated Web page for fundraising that you can customize with images, video, and a description of your work. It is affiliated with Indiegogo, the crowdsource fundraising platform that—unlike Kickstarter—lets donors receive tax deductions and allows you to keep funds raised even if you do not meet your goal. Fiscal sponsorship is not free: both The Field and Fractured Atlas charge annual membership fees and collect a small percentage of each donation the project receives.
Fiscal sponsorship also makes it easier to work with organizations that would not otherwise serve individual artists and to accept donations of materials, known as in-kind donations. In New York, this means access to the affordable Costume Collection run by the Theatre Development Fund or Materials for the Arts, where you can find everything from used office equipment to beads for jewelry.
In It for the Long Haul: The Nonprofit Corporation
There are some cases in which creating a more permanent business might be appropriate. But before you launch a new nonprofit, take into account some important considerations. Arts nonprofits have been incorporating at a fever pitch over the last decade, even as the number of foundations supporting the arts has declined. Corporate support has declined as well and, for better or worse, “art for art’s sake” is not as popular as it used to be with major funders. That is, projects no longer are funded solely based on their artistic merit. Unless your work can compete with the best-quality performing arts companies in your area, to be competitive it must also prove its educational, social, or political relevance.
Programs such as El Sistema USA—based on the Venezuelan movement that uses music to lift children out of poverty—has the kind of qualities that appeal to the foundations and donors needed to support a nonprofit over the long term. Funders are also wary of duplication: if you start a new opera company, for example, you have to make the case that the work you are doing is truly not being done by anyone else.
Another thing to consider before starting a nonprofit is that incorporation does not tend to be portable. That is, if you incorporate in New Jersey and then move to New York or start doing activities in New York, you will be disappointed to learn that where you incorporated might limit your eligibility for some funders. For example, New York City’s Department of Cultural Affairs makes grants only to New York City nonprofits, even if a group that happens to have incorporated just across the river in New Jersey is doing great work in town. Before you incorporate, make sure you don’t plan to move for a while and set up your company in the place where you are planning to work.
That all said, there still are reasons for starting a new nonprofit. Just the act of setting up a full-fledged business can make you more committed to the project, spurring momentum among founders and donors alike. Another advantage is the improved chances for securing foundation and government grants. Some government agencies (such as the New York State Council on the Arts) restrict the number of projects that can apply from one fiscal sponsor, and most foundations prefer to give to incorporated nonprofits.
If you are considering launching a nonprofit, think carefully about where your funding will come from and what the long-term potential of the work you’re doing is. If you are filling a unique role in the market and can create a plan for how you will grow and develop over the years, you might be a good candidate. But keep in mind that, unlike a fiscally sponsored project, a nonprofit needs a board of directors who are willing to be legal and financial guardians of the business, volunteers and/or staff (and salaries) to do the work, and clear, sustainable sources of income. If you just have some interesting ideas and want some structure to help you fundraise, fiscal sponsorship might be all you need.
Making a Profit: The Limited Liability Company
An alternative to starting a nonprofit business is to incorporate as a Limited Liability Company, or LLC. Though generally for enterprises that expect to earn income without charitable donations, this entity is especially useful for business partners entering the venture together. Money earned from an LLC passes directly to its members, unlike a nonprofit, in which revenue supports the company itself. An LLC separates the business from the people involved in the business, offering tax and legal benefits. Namely, if someone decides to sue the business, they cannot go after your personal assets—hence, “limited liability.”
Unlike nonprofits or fiscally sponsored projects, however, LLCs cannot solicit charitable donations. Classical music enterprises tend to be nonprofit corporations. However, if you expect your music to be profitable without needing to fundraise, you might consider incorporating as an LLC. The medieval vocal quartet Anonymous 4, for example, is an LLC and earns revenue primarily through its touring and CD sales. If you can create an act that appeals to a wide range of presenters and can tour and record readily, you could leave the nonprofit world behind altogether.
Putting It All Together
Is your head spinning yet? To sum up, a business without some institutional affiliation is like being single, fiscal sponsorship is like moving in with your boyfriend, and incorporating is like getting married. Each one involves its own level of commitment and reflects your expectations for the life of the project.
If sorting all this out sounds tedious, it’s just part of the decisions you need to make as an entrepreneur. The distance between artistic inspiration and slumping over an Excel spreadsheet is shockingly short. But putting a few structures in place frees you up to do what you wanted to do in the first place: make music.
