Start Your Own Dance Company, Part 2

Posted on November 15, 2005 by

In Part 2 of our series on starting a dance troupe, we ask (and answer) the tricky questions: What are the pros and cons of being a nonprofit, and the logistics of becoming one? 

Few people start a dance company with dollar signs in their eyes. Only the extraordinarily talented and extremely lucky few gain widespread fame or glory, and even then, financial rewards are elusive. For the vast majority, the value of a company is more ephemeral—it’s hard to put a dollar value on the importance of an artistic outlet or the pleasure of working with gifted collaborators.

Because of the economic realities of running a concert dance troupe (expenses are high, funding and revenue low), most are run as nonprofit organizations, meaning they meet the requirements of Section 501(c)(3) of the Internal Revenue Code. As a result, nonprofits are often referred to as 501(c)(3)s. (One rare for-profit company in the U.S. is Momix, the modern-dance offshoot of the wildly popular Pilobolus, itself a nonprofit.)

Although there are distinct benefits to nonprofit status, it is not the right solution for all dance companies. How do you determine if, when and how you should incorporate as a nonprofit? The complicated answer depends on a variety of factors, including your company’s revenue, established infrastructure—and future goals.

The Nonprofit Pros
The benefits of nonprofit status are straightforward. A nonprofit company is exempt from taxes, including income tax and some sales and real-estate taxes, and is eligible for special postal rates. Nonprofits can apply for grants from the local, state and federal government and foundations, the bulk of which only offer money to nonprofit organizations, and can receive donations that are tax-deductible from individuals. Reduced rates in theater rental and advertising, among other benefits, sweeten the deal.

“When you compare the amount of money it costs to rent a theater and pay for lighting, costumes and advertising to the amount of seats that a small theater has—keeping in mind that you can’t charge $50 a seat in a small theater—you realize it’s almost impossible to make money,” says Jennifer Weber of Decadance Theater, a hip-hop company in New York City that is in the midst of applying for nonprofit status.

Randy Swartz, artistic director of Dance Affiliates and president of Stagestep in Philadelphia, agrees: “Unless you have an immensely popular group instantly, you’re going to be hard pressed to match box office to expenses.” In addition, the formation of a nonprofit corporation provides protection for the company’s members and directors from personal liability, should the company face a lawsuit or insolvency.

With the break-even point for performances more and more difficult to reach, the reduction in the tax burden and increase in potential income make applying to become a nonprofit corporation seem like a no-brainer for dance companies.

The Nonprofit Cons
But the decision is anything but simple. “You have to have a certain amount of infrastructure once you’re a 501(c)(3), and you need to make sure that you can support that infrastructure,” advises Barbara Bryan, who manages a number of small dance companies, including John Jasperse Company, Tere O’Connor Dance, Wally Cardona Quartet and the choreographer Sarah Michelson. “You have to form a board of directors and hold quarterly board meetings, which becomes increasingly complicated as the board grows. You have to put employees on payroll, which involves paying for unemployment insurance as well as disability and workers compensation insurance.”

Although the definition of the employer/employee relationship doesn’t change with nonprofit status, many dance companies find that once they are official nonprofit corporations, they are “on the radar” of the Internal Revenue Service, and the increased level of scrutiny of their operations forces them to get all their financials in compliance. With a payroll system, dancers are treated as employees, rather than independent contractors. As a result, federal, state and local taxes, as well as Social Security, must be withheld from their salaries.

Another drawback to filing for 501(c)(3) status is the cost of filing and of staffing to stay in compliance. Although organizations such as Volunteer Lawyers for the Arts (or the accountant and lawyer you wisely invite to join your Board of Directors) can help with some of the initial paperwork, there is a filing fee of around $1,500 to contend with. In addition, nonprofits have to submit detailed documentation to federal, state and local authorities to prove compliance, requiring staff to prepare and file this information and to maintain payroll.

Add to this the fact that after becoming a 501(c)(3), your company’s financial information is available to the public, and the prospect can seem less enticing. As a nonprofit, of course, your company is essentially a charitable organization—one that is formed for the common good. You may struggle with the idea of pouring your heart, soul and waking hours into an institution that doesn’t really belong to you. “When you create a nonprofit organization, it’s no longer yours,” says Swartz. “You don’t own it. It’s held in the community trust. If and when that nonprofit dissolves, its assets must pass on to another nonprofit. It cannot be distributed in any way, shape or form to an individual.”

Attaining Nonprofit Status
If you do decide that nonprofit status is for you, keep in mind that becoming an official nonprofit, tax-exempt entity is a process that often parallels the growth of a dance company. (See “10 Steps to Creating a Nonprofit, Tax-Exempt Corporation” on page 157 for the steps you should take.)

Most dance troupes start off informally, with earnings and expenses reported on the artistic director’s tax return as small business or self-employment earnings. A common intermediate step is obtaining nonprofit status under the umbrella of a larger nonprofit, usually a local dance service organization. As a company becomes more established and revenues increase, official nonprofit, tax-exempt status becomes more and more important.

“There are different stages,” confirms Dana Tai Soon Burgess, artistic director of Dana Tai Soon Burgess Dance Company, a modern troupe based in Washington, DC. “The thing about becoming nonprofit is that you want to do it organically, when you’re large enough, and when you can answer questions like, ‘Why do I really need a board of directors?’” Burgess started working with dancers in 1991 and solidified the company in 1993. The troupe started the process of filing for federal tax-exempt status in 1996 but didn’t complete all the paperwork until 1997.

Alternatives to the For-Profit/Nonprofit Conundrum
For companies seeking some of the benefits of nonprofit status without actually filing for federal tax-exempt status, assuming nonprofit status through a fiscal agency can be an appealing solution. Service organizations act as umbrellas for smaller companies that share their mission. For a small fee or a percentage of the income from grants, these organizations enable the smaller companies to adopt their nonprofit status in some parts of their operations.

Decadance Theater spent a few years using The Field in New York City as a fiscal agent. “It’s something that I would definitely recommend,” says Weber. The vast majority of—but not all—foundations allow companies with nonprofit status through a fiscal agency to apply for grants.

There are limitations to this kind of nonprofit status, however. Bryan notes that once a company starts bringing in a fairly significant amount of grants (she estimates the breaking point at $60,000 per year), it doesn’t make financial sense to give a large chunk of the grant money to a third party. And individual donors can be loathe to send checks through a third party.

The nonprofit status itself has limits, which has led Decadance to move beyond fiscal agency. “You can only use it to get donations and grants,” explains Weber. “The Field will only accept the money if it’s a donation; it can’t be a payment for a service rendered, like a performance, so it gets complicated.” In addition, organizations that offer fiscal agency are generally in cities; companies in less densely populated regions of the country may not be able to find such sponsorship.

Thinking Ahead
Whether or not to pursue nonprofit status may ultimately depend upon your company’s goals. Bryan points to one choreographer she works with who has been successful, bringing in upwards of $200,000 annually, but hasn’t applied for nonprofit status because she’s not certain that she wants to continue the demanding schedule that a dance company requires in the long-term.

On the opposite side of the spectrum is Kathleen Dyer, who sought and received nonprofit status in 2001 for her small, emerging troupe, KDNY Dance. “I’m determined that I’m going to get bigger every year, I’m going to get more organized every year and I’m going to do it just by sheer perseverance,” says Dyer. Like many dancemakers with troupes of all sizes, Dyer has her own definition of wealth, valuing a life spent creating and sharing art more than monetary profit. DT

Caitlin Sims is the Editor at Large of Dance Teacher and Dance Spirit magazines.

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