Fiscal Sponsor vs LLC vs Non-Profit: What's a dancer to do?
2 February 2011
I fellow Baltimore dance maker recently emailed me asking for some explanations about what it meant to have a fiscal sponsor. Since she's not the first to ask, I'm assuming that there are others out there that, like me when Effervescent was first starting, were superbly confused about these different classifications and their implications. I thought I would publish my own understanding of these differences, with the hopes that it might help others feel less lost. Even better, if there are some lawyers or accountants out there that could clarify, correct, and advise, that would be even better. Contact Me! Post a comment!
"I have been contemplating a while about staying as an independent artists vs. non profit status vs. fiscal sponsorship. I was looking at Fractured Atlas and noticed that EC was listed as a member. I have a bunch of questions and wondered if you could give me some advice based on your experiences"
My Experience:
1) It's mostly about taxes and appearances.
2) Discuss your options with the relevant parties.
Foundations/grantmakers/sponsors usually prefer to donate to an entity that is a 501 (c) 3 because therefore their donation is not taxed. And, as a reciptient, you don't (usually) have to pay taxes on donations. So, if you're working towards, or already dealing with donations over $1,000, fiscal sponsorship is great because it gives you a 501(c)3 status, without having to be a non-profit.
The drawbacks for fiscal sponsorship is that all fiscal sponsors take between 5-10-% and sometimes have administrative fees. So, if you're working on a smaller scale (infrequent donations or withdrawals of less than $1,000) the costs of fiscal sponsorship may not outweigh the 501(c)3 status. For Effervescent, even though we would fall under that description (infrequent, relatively small donations of cash or goods) it was in our best interest as we were getting started to have the fiscal sponsor, because we were able to get goods donated to us (Food, Marley floor) because we could offer a tax deduction. As I started writing grants, it became a definite benefit, simply because grant-makers prefer that kind of paper trail, and to be able to say, we donated X to fiscally sponsored project Y, even though, in the end, the donor recipient might actually loose a chunk of the donation to the fiscal sponsor.
Call Fractured Atlas and ask to speak to someone. As far as I can tell, they approve sponsorship for anyone who is not a complete sham, and has a sustainable model. It won't hurt your application to call with questions.
Do you have a business account? It sounds like that might be the best next step, before becoming fiscally sponsored. In order to get a business checking account you will need a trade name and a tax ID number.
The trade name is whatever you want: Jane Doe Dances. You have to register this with the state department of taxes and assesment (SDAT). You DON'T, and I learned this the hard way, need to incorporate into an LLC or anything to get a trade name. An LLC gets you is a tax ID # distinct from your social security #. There are benefits to that, if you're running a business (not a non-profit.) If you register a trade name with SDAT, and go to a bank (I recommend PNC, they're really nice and helpful), they will ask you for a tax ID #. Since you aren't an LLC, you can use your SS# as your Tax ID #. This makes you the "sole proprietor." You have to remember, that in this crazy world people are different from corporations. Corporations aren't just huge big things like Microsoft, it's basically any business. In the eyes of the law, a person and a business/corporation are seperate. As far as I can tell, this is kind of a protection system, creating a membrane between the rights of a business entity and a the rights of a regular human. I would recommend going to PNC (the one in Mt. Vernon is nice) and having them talk you through it. PNC is great because they do not have a minimum for what you need to keep and/or spend from your business account. For example, Bank of America requires business accounts to always have X$$, be processing at least Y$$$ in withdrawals, etc otherwise there are crazy monthly fees.
Having a business account will not affect your decision to become fiscally sponsored or pursue a non-profit. It's just like having another bank account, but with a different name. And business account taxes are separate and a bit different than your personal taxes. When you are paid for your services (fees/wages), it should go into your business account, not your personal account. Suppsedly, if you do your research, this can save an artist a lot of money. You can 'write things off' as a business expense. For a dancer, this could be anything from yoga classes/gym membership to haircuts. I'm a little foggy in this department. I have not done enough research into it. I can't say, with any certainty, that a business account will benefit you financially in any way. Since you are collecting for services performed by you personally. With Effervescent, we needed a business account so people paying us to teach a class, host an event, etc could pay Effervescent Collective, not Lily Susskind, which would have seemed kinda sketchy. It was a comfort thing for those paying us wages. Also, it helps me keep track of Effervescent finances as separate from my own. For you, this may not be necessary. I don't know. I'm sure a bank could convince you there are benefits.
Becoming a non-profit is a time consuming and expensive process. Yes, you need a board and bylaws. It's part of what makes you 'incorporated.' If you feel like you have already a group of supporters that you know would be excited and invested in being your board, than you should talk about it with them. Just get them together, pitch the idea. Last I checked, there were several books on starting non-profits at the Charles Village B&N. Non-profit status is really for folks who are doing...well...non-profit work. If you are teaching classes, performing, and choreographing, in order to sustain and promote Jane Doe the teacher, performer, and choreographer, then you're not really a non-profit. To be a non-profit, you need to be clear on who is profiting from your work (besides you). With Effervescent, I expect to go down that road someday, because from the very beginning our mission has been aimed towards supporting emerging dance around us that we feel stimulates urban Baltimore's art scene. We hope that others are profiting form our work. If we were just teaching and performing, I think it would be a bit slimey to suggest we were a non-profit.
When I first got started in all this, I remember thinking. "I'm a smart kid, why is this so confusing?" So, don't be discouraged. The SDAT is akin to the DMV. No one is paid to help you, so they don't. You are advised to get a lawyer. I was unable to get any help from the Maryland Lawyer for the Arts. So I just did some online research and winged it. I made some expensive mistakes. Be warned, filing anything at the SDAT costs at least $150. The explanations I'm giving you are based purely off my own personal experience, I've had no official legal consultation. My overall suggestions would be to go ahead and talk to people in person. Talk to someone at PNC (don't be shy to bring a portfolio, so they can understand better what you do), talk to Fractured Atlas. Talk to the folks who are most generous with their financial support aka potential board members. Don't bother even trying to talk to anyone at SDAT (it's a Kafka-esque nightmare). I hope to get the B'more Dance Hub site up and running this month. I'm realizing I should include a similar explanation of these distinctions on the "Resource" page. After wandering through the dark forest myself, I'm glad to be able to help out a fellow dance-maker. That's what Effervescent is all about!
Call Fractured Atlas and ask to speak to someone. As far as I can tell, they approve sponsorship for anyone who is not a complete sham, and has a sustainable model. It won't hurt your application to call with questions.
Do you have a business account? It sounds like that might be the best next step, before becoming fiscally sponsored. In order to get a business checking account you will need a trade name and a tax ID number.
The trade name is whatever you want: Jane Doe Dances. You have to register this with the state department of taxes and assesment (SDAT). You DON'T, and I learned this the hard way, need to incorporate into an LLC or anything to get a trade name. An LLC gets you is a tax ID # distinct from your social security #. There are benefits to that, if you're running a business (not a non-profit.) If you register a trade name with SDAT, and go to a bank (I recommend PNC, they're really nice and helpful), they will ask you for a tax ID #. Since you aren't an LLC, you can use your SS# as your Tax ID #. This makes you the "sole proprietor." You have to remember, that in this crazy world people are different from corporations. Corporations aren't just huge big things like Microsoft, it's basically any business. In the eyes of the law, a person and a business/corporation are seperate. As far as I can tell, this is kind of a protection system, creating a membrane between the rights of a business entity and a the rights of a regular human. I would recommend going to PNC (the one in Mt. Vernon is nice) and having them talk you through it. PNC is great because they do not have a minimum for what you need to keep and/or spend from your business account. For example, Bank of America requires business accounts to always have X$$, be processing at least Y$$$ in withdrawals, etc otherwise there are crazy monthly fees.
Having a business account will not affect your decision to become fiscally sponsored or pursue a non-profit. It's just like having another bank account, but with a different name. And business account taxes are separate and a bit different than your personal taxes. When you are paid for your services (fees/wages), it should go into your business account, not your personal account. Suppsedly, if you do your research, this can save an artist a lot of money. You can 'write things off' as a business expense. For a dancer, this could be anything from yoga classes/gym membership to haircuts. I'm a little foggy in this department. I have not done enough research into it. I can't say, with any certainty, that a business account will benefit you financially in any way. Since you are collecting for services performed by you personally. With Effervescent, we needed a business account so people paying us to teach a class, host an event, etc could pay Effervescent Collective, not Lily Susskind, which would have seemed kinda sketchy. It was a comfort thing for those paying us wages. Also, it helps me keep track of Effervescent finances as separate from my own. For you, this may not be necessary. I don't know. I'm sure a bank could convince you there are benefits.
Becoming a non-profit is a time consuming and expensive process. Yes, you need a board and bylaws. It's part of what makes you 'incorporated.' If you feel like you have already a group of supporters that you know would be excited and invested in being your board, than you should talk about it with them. Just get them together, pitch the idea. Last I checked, there were several books on starting non-profits at the Charles Village B&N. Non-profit status is really for folks who are doing...well...non-profit work. If you are teaching classes, performing, and choreographing, in order to sustain and promote Jane Doe the teacher, performer, and choreographer, then you're not really a non-profit. To be a non-profit, you need to be clear on who is profiting from your work (besides you). With Effervescent, I expect to go down that road someday, because from the very beginning our mission has been aimed towards supporting emerging dance around us that we feel stimulates urban Baltimore's art scene. We hope that others are profiting form our work. If we were just teaching and performing, I think it would be a bit slimey to suggest we were a non-profit.
When I first got started in all this, I remember thinking. "I'm a smart kid, why is this so confusing?" So, don't be discouraged. The SDAT is akin to the DMV. No one is paid to help you, so they don't. You are advised to get a lawyer. I was unable to get any help from the Maryland Lawyer for the Arts. So I just did some online research and winged it. I made some expensive mistakes. Be warned, filing anything at the SDAT costs at least $150. The explanations I'm giving you are based purely off my own personal experience, I've had no official legal consultation. My overall suggestions would be to go ahead and talk to people in person. Talk to someone at PNC (don't be shy to bring a portfolio, so they can understand better what you do), talk to Fractured Atlas. Talk to the folks who are most generous with their financial support aka potential board members. Don't bother even trying to talk to anyone at SDAT (it's a Kafka-esque nightmare). I hope to get the B'more Dance Hub site up and running this month. I'm realizing I should include a similar explanation of these distinctions on the "Resource" page. After wandering through the dark forest myself, I'm glad to be able to help out a fellow dance-maker. That's what Effervescent is all about!
