Pros and Cons of 501(c)(3) Nonprofit Status for Artists
When operating an arts organization or other kind of project, you have to decide what kind of formal structure is best for that project. Should you be a 501(c)(3) nonprofit? A worker-owned co-op? A collective? A business? A community group without any official structure?
The right container for your artistic practice can give you the support structure you need to flourish and the best options for funding your work.
Many artists and arts organizations end up looking into becoming 501(c)(3) nonprofits as they work towards formalizing themselves and getting access to the resources that they need to complete their work. For many artists, this particular nonprofit status is immensely helpful. It can help you get access to more donations, more opportunities, more guidance, and more legitimacy. But, it can be expensive, time-consuming, and constraining.
We’ll be covering the pro’s and con’s of 501(c)(3) nonprofit status here to help you better determine if it’s a good fit for your needs.
What is 501(c)(3) Nonprofit Status?
If you’re unfamiliar with the world of nonprofits, grants, and fundraising, you might never have heard of 501(c)(3) nonprofits or you might have heard of 501(c)(3) nonprofits but not know what they are. [If you're not too familiar with this world, check out Fundraising for Artists: The Ultimate Guide!]
501(c)(3), most simply, is a specific tax category for nonprofit organizations. Nonprofits that fit into this category are called 501(c)(3)’s because that’s the portion of the U.S. Internal Revenue Code that covers these particular kinds of nonprofits. Not all nonprofits are 501(c)(3)’s, but all 501(c)(3)’s are nonprofits.
This status isn’t about whether your work is important or whether you are successful. It’s fundamentally about how the government taxes you and how you can receive money. Nonprofits with 501(c)(3) designations can receive tax-deductible donations. Any individual donor (if they itemize their taxes) or institution that donates to one of these nonprofits can deduct the amount that they donated from their final taxable income. Nonprofit entities are also exempt from paying federal income tax.
Pros of 501(c)(3) Nonprofit Status
The most obvious benefits of 501(c)(3) nonprofit status are financial.
501(c)(3) nonprofits are exempt from paying federal income tax. That means that you could save a great deal of money if you decide to become a nonprofit instead of operating as, for example, a for-profit business.
501(c)(3) nonprofits can accept tax-deductible donations, which have several benefits. Your donors can deduct their donations from their own taxes if they itemize their taxes. This lets you give your donors a small perk as part of their donation to your project.
You can also access more funding if you are able to accept tax-deductible donations. Some individuals might simply prefer to make tax-deductible donations either because they want the tax incentive or because they feel that there is more oversight with a nonprofit than with other forms of giving like crowdfunding or sending direct payments via Paypal or Venmo. Others might have access to funds through their jobs that they can only donate to tax-deductible sources or their job will match donations to a 501(c)(3) nonprofit.
Some grants and fellowships are only available to 501(c)(3) nonprofits, meaning that you would need that status in order to apply for those opportunities.
Additionally, there are also non-financial benefits to 501(c)(3) nonprofit status. One of which is that it encourages more formal organization and structure. Nonprofits need mission statements and boards to guide their work. Putting together your mission statement as part of your nonprofit application can help you clarify what it is that you do and what it is that you want to be doing.
Building a board for your nonprofit can help you find the right support and guidance from other people in your field. As you start any project, you’ll be talking with your peers, mentors, and community members and turning to them for advice. A board formalizes some of those conversations and can give you a more structured way of amassing insight, guidance, and collaboration.
Finally, for many artists and arts organizations, 501(c)(3) nonprofit status can give a feeling of legitimacy. You might feel like you’ve “made it” if you have this recognized tax status or like you are more legitimate than you were before. We recognize that for many people this is a true and valid feeling and that outsiders might take a 501(c)(3) nonprofit more seriously than a community group without a formal tax designation. However, we want to affirm that nobody needs to be a nonprofit in order to do powerful, creative, visionary work.
Cons of 501(c)(3) Status
In addition to considering the benefits of 501(c)(3) nonprofit status, it’s important to acknowledge the potential drawbacks.
Incorporating as a 501(c)(3) nonprofit requires a lot of paperwork, all told. The application process is paperwork-intensive, for starters. Then, once you’ve gotten your 501(c)(3) status you’ll need to keep meticulous records of your finances, budget, and other going-on for tax purposes and for public accountability. You need to be able to demonstrate that you are doing what you say you are doing. And you need to make publicly available information about how you operate like your 990 and any audit information. As a 501(c)(3) nonprofit, Fractured Atlas lists both our 990 and our most recent audit on our website. For the unprepared or for people who don’t have a lot of administrative experience, the paperwork requirements of a 501(c)(3) nonprofit can be daunting.
It can take a lot of time to set yourself up as a nonprofit. The whole process can take between two and 12 months, and sometimes longer. In this time period, you’ll be submitting paperwork and responding to follow-up questions about your application. When we spoke with language preservation organization Wikitongues, they shared that their process took over a year.
The process of becoming a 501(c)(3) can also be expensive, even if you expect that it’s the right financial decision for you in the long term. There are fees associated with the application process, plus you might need to bring in a lawyer or an accountant.
If you do decide to go the route of a 501(c)(3) nonprofit, you might find it challenging to stay nimble as an organization or as a project. Once you have a board, a mission statement, and all of the legal framework set up around your specific mission, it can be challenging to switch strategies or focus. The more institutional layering you have around a project, the more challenging it can be to turn the ship.
Fiscal Sponsorship is a Middle Ground
If you are looking for the benefits of 501(c)(3) nonprofit status without some of the administrative and financial burden, you might consider fiscal sponsorship.
Fiscal sponsorship is a relationship between a 501(c)(3) nonprofit and a group or an individual whose work falls within the organization’s overarching mission. It enables the nonprofit to extend some benefits of its status to that individual or group without them having to file for nonprofit status on their own.
Fiscal sponsorship allows folks without tax exemption to access some of the benefits of a 501(c)(3)’s status to raise funds and execute projects as long as their work furthers the mission of the nonprofit.
Fiscal sponsorship can help you apply for grants that are available to either 501(c)(3) nonprofits or fiscally-sponsored projects, opening up those funding opportunities. Fiscally-sponsored projects are also able to accept tax-deductible donations.
Plus, because one has to apply to be fiscally sponsored by an organization and that sponsoring organization will have some oversight over your funds, donors who are most comfortable donating to an established organization might be more encouraged to support your work if it’s through a fiscal sponsor.
As part of Fractured Atlas’s mission of supporting artists and creating a more equitable arts ecosystem, we serve as fiscal sponsor to over 4,000 projects.
Find the Right Container For Your Project
501(c)(3) nonprofits are not fundamentally better than for-profit organizations, community groups, co-ops, or any other way that you might organize yourself and your collaborators.
They are all designed to fit different needs, different projects, and different funding models. Instead of fixating on which is the best or most impressive one to choose, we encourage you to think more about your needs and your capacities. Do you need to be able to accept tax-deductible donations, do you need or want the advisory assistance of a board, do you want to be under the umbrella of a larger organization?
Whether you choose to become a 501(c)(3) nonprofit, find a fiscal sponsor, or organize yourself in a different way, we hope that you are making that decision based on what will help you most successfully realize your vision in a supported, sustainable way.
If you’re curious about fiscal sponsorship, you can learn more about our fiscal sponsorship program to see if it can help support your creative vision.
About Nina Berman
Nina Berman is an arts industry worker and ceramicist based in New York City, currently working as Associate Director, Communications and Content at Fractured Atlas. She holds an MA in English from Loyola University Chicago. At Fractured Atlas, she shares tips and strategies for navigating the art world, interviews artists, and writes about creating a more equitable arts ecosystem. Before joining Fractured Atlas, she covered the book publishing industry for an audience of publishers at NetGalley. When she's not writing, she's making ceramics at Centerpoint Ceramics in Brooklyn.