By: Matthew Kwatinetz

Over the course of the last few months, I’ve provided background to help each of you answer the question that I get asked most frequently by producers and artists: “Should I Start An(other) Organization?”. This question has no single answer, but is a function of discussing the three core issues of liability, funding and control which tend to be the driving factors for creating legal entities (organizations which have a legal status as recognized by the City, State, and/or Federal government) and determining their type, whether that be based on tax status (to simplify: for-profit vs. non-profit) or governance structure (for example: collectives/democracies, companies, partnerships, associations, LLCs, Corporations, etc.). The last column focused on liability—protection against exposure and downside, and in this issue I’d like to briefly discuss how forming an entity can effect funding. (*Note: All past columns are now available online at www.capitolhillarts.com/producers-corner ).

Every situation is particular, but to grossly oversimplify funding to add information as it relates to whether you should start an organization, there are two primary issues that you need to immediately address before moving forward: (1) Am I seeking funding for a project/event or for an operational group; and (2) do I hope to Recoup the funds that I obtain—that is do I intend to make the money back. The answers to these two questions form a matrix of four possibilities, each matched with a set of common strategies.

A Quick Note: By Operational Group I am referring to a situation in which you intend to work with the same group of people to produce more than a single project. Recoupment is a technical term referring to a cash-flow break-even point: this is not profit! Recoupment describes the moment at which the dollars that went out in cash flows are matched by what came in through earnings, grants, sponsorships and/or contributions. This is called a net zero position in theory, “cash flow break even” in finance, and “recoupment” in producing. If you have raised money to produce, and then are able to just recoup, there is no profit—but neither are there losses.

Project/No-Recoup: If you are producing and/or creating a project that is not ongoing, and your primary interest is in doing the project (as opposed to making it financially lucrative), I would suggest that you not form an entity. Your orientation is a non-profit one here. If your goal is not primarily (or at least equally) financial, attracting investors (who are not simply personal friends) is going to be difficult, and may be considered by some unethical. So why not form your own non-profit? Well, the paperwork and legwork is proportionally quite large in relation to the scope of most project/events. And the advantage is not that great if you are not planning an ongoing operation—there is a long waiting period, a great deal of organizational work to be done, and a significant history that has to be established in order to qualify for most grants and sponsorships. A much better route than forming your own entity here is to become a program or project of another existing non-profit organization (Two good examples: The Shunpike, Allied Arts). Other words used to describe this relationship are “fiscal sponsorship” or “non-profit umbrella”. As a program/project of another non-profit you can use their history, Board credentials, connections, etc. to qualify for grants, sponsorships, and tax-deductible status without having to go through the headache of forming your own organization. You will have to pay a fee as a percentage of revenues, but this is well worth it—if you make nothing, you will pay nothing. Always make sure you have a negotiated contract for this type of relationship.

Project/Recoup: This is the most common situation that is seen in the for-profit producing world, and the situation that is most likely descriptive of shows currently running on (and Off-) Broadway (as well as in film). If you have a strong and reasoned belief that your project is commercially viable (even if it is not commercial) given market conditions and available audience, you should choose a for-profit status and form an LLC or LLP based out of the state from which you intend to raise/earn most of your money (ie, either where your investors live or where you will produce—consult an accountant). Investors will require protection against losses, and participation in profits—you will obtain your share of profits based on how the project/event performs financially. An ongoing run of a show (ie, open-ended run of multiple months) definitely belongs in this category. I would advise picking up a copy of Farber’s From Option To Opening to walk you through the process. Depending on how you form this entity, you might still be eligible for some grants, especially during the development process of the show.

Operational Group: If you are forming an operational group, you will eventually want to form an entity (or be acquired/hired by one) in order to obtain funding. If the entity is formed with the intent of staying in the black and maintaining a cash-flow positive position (ie, profitable), it should be a for-profit. What particular type of for-profit is to be formed (ie, LLC, LLP, S- or C- corporation) will be determined by how the money is flowing into the entity (what kind of protection is needed for investors/partners) and your accountant’s advice on tax exposure. On the flip side, if the entity is formed with the intention of achieving a charitable or social purpose (as opposed to a financial basis) then you probably want to choose a non-profit status (by federal default you will then be a special type of C-Corporation). It often behooves this second type of organizational group to begin as a project/program of another non-profit that has a history and achieved status—this will shortcut some of the headaches of start-up and make funding immediately available (and donations immediately deductible). It will also give you a chance to “try it out” without an unmanageable exit strategy.

I have to strongly stress here that every situation is particular and there are no turn-key solutions. But there is a mentality with which to analyze common strategies: itt is that paradigmatic way of thinking about the issues that I am providing for your consideration here—there is a logic behind the creation of each type of entity and strategy. Beyond that, I leave it to you to make whatever exceptions and break whatever rules are necessary to accomplish your producing goals. If you would like to send me your particular question, I will gladly try to answer it, time permitting!