What’s a Nonprofit Arts Organization?

A brand new episode in the #ArtsManaged series focuses on what a nonprofit arts organization is, and why they exist. You’ll also find an overview of three broad “sectors” within which we aggregate and animate people, money, and stuff – the private sector (where somebody owns the money and the stuff), the public sector (where everybody owns the money and the stuff), and the plural sector (where nobody owns the money and the stuff…rather it’s held in the public trust).

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TRANSCRIPT

So here’s an important but annoying question. If arts experience and expression are so fantastic, why do so many arts organizations require a subsidy? Why do they need grants or gifts or public money, rather than capturing their full costs from enthusiastic audiences that are excited to get what they make?

Hi, I’m Andrew Taylor. I’m on the faculty of Arts Management at American University. And this is ArtsManaged, a series of resources about Arts Management: what it is, how it works and how to get better at it.

In this video, we’re talking about nonprofit arts organizations, a very particular configuration of people, money, and stuff that’s common to the arts in the United States and, under different names, common around the world. A nonprofit arts organization can earn income, certainly, from direct sales through ticket sales through entry fees, but can also get income through contributed sources: like individual donors, like corporations, like foundations, like governments, city, state, county, national.

As a first answer to that important but annoying question: There are a lot of things we do individually and collectively that do not capture their full cost back from a consuming audience. And thank goodness for it. As individuals, as groups, as communities, we need a world of resources and services and opportunities and options. And therefore, we need a world of ways of organizing people, money, and stuff.

In that wide world of aggregating and animating people, money, and stuff, it’s useful to think in three broad categories or sectors. Each of these sectors has different logic, has different resources, has different ways of aggregating and animating people, money, and stuff. And you’ll find some version of these in almost every country around the world. And these are broad cartoons just to help us think about different ways of organizing people, money, and stuff.

So the first sector we might think about is a PRIVATE sector. In the private sector, SOMEBODY owns the money and stuff, and somebody makes decisions as an owner about where and how to animate that money and stuff into the world. They encourage and engage other people, so they aggregate people, often through economic incentive. They pay them to do the work. And they get an audience or consumers that purchase the work. And their decisions are based essentially on economic logic in the grand scheme of things. On gain and loss. On revenue and expense. On growth of wealth or income. So in the private sector, somebody owns the money and stuff, and somebody makes those decisions based on their ownership interest. And that somebody can be an individual, a group of people, or a large number of people who would own what might be called stock.

So that’s the private sector. That’s where you’d find for-profit businesses, commercial entertainment, commercial work of any kind, that has the intention and the goal of earning back its full cost of operation plus a profit or a growth in resource or asset.

Another way of working we can call the PUBLIC sector, and this is the sector where EVERYBODY owns the money and stuff and decides together how it needs to be deployed. This is, of course, the government. And you can think of a full range of things that really require everybody who is represented by the government to have access to the decisions being made. Things like roads and infrastructure and systems and schools, public resources and utilities, things that wouldn’t really be sustainable or possible without some collective ownership. So in the public sector, everybody owns and we have different ways around the world of deciding, well, who gets to say, what everybody needs. The United States is a representative democracy. So we elect people to represent our interests. And those people work in the public sector. Obviously, they still get paid. And often they hire other people to do the work. So many of the private sector tools are still available. But the public sector is organized around political logic where the private sector was organized around economic logic.

And then there’s this third sector, which has lots of different names. The third sector is not private, and it’s not public. And often it’s therefore called the nonprofit sector, the independent sector, the volunteer sector, the third sector. I like Henry Mintzberg’s phrase for it as the PLURAL sector, because it includes essentially a social logic. There are things we do can and want to do together in groups, not necessarily the whole public sector, and not certainly just owners. But people across multiple contexts want to work together to create some opportunity, to solve some problem, to advance some cause, to make something happen that wouldn’t otherwise happen. The plural sector is about group logic, about social logic, about creating social benefit and social outcomes.

Again, the private sector and the public sector can both deliver on important social outcomes. The plural sector is there often to fill the gaps or enhance the work of those other two sectors, or to do things that those other sectors wouldn’t do at a level or rate or in a diversity that we might want.

A nonprofit organization is a creature of the plural sector. It’s one of many ways of organizing people, money, and stuff toward social outcomes. And it just so happens that it’s a particularly useful way for creative expression and experience to be organized for ways we can talk about in other videos. A nonprofit organization is incorporated like any other organization in the United States: at the state level. The state is responsible for corporate entities and for organizing and monitoring them over time. But then it has to get special approval from the Internal Revenue Service, a federal agency, to say that, “Yes, you are behaving as a charitable institution, you’re serving a public purpose, you’re governed in a way that’s consistent with that purpose and that practice, you’re following certain laws and outcome goals. And we will keep track of you over time.” And the IRS therefore says, “You are a tax exempt organization, you can behave in that way. And you can receive contributed income from multiple sources. And for many of those sources, the income they give you will be deductible on their own taxes.”

So a special kind of nonprofit is the tax-exempt public charity. And that’s a very common structure for the arts in the United States.

So why would we need this form? Well, again, we want many things in our lives and in our world, and we need many things in our lives and in our world to make our societies work, to make our families work, to make our bodies work. We need health care, we need education, we need public services, we need roads, we need access to things that inspire and connect us, and the arts fall into that category. We want a wide array of things in our world. And among them, we want artistic expression and experience. And beyond that we want artistic expression and experience that goes beyond what might be immediately able to capture its full cost back from a consuming audience. We want things that are different than the market would bear, that are more diverse in the voices they bring, that are more technically proficient or advanced than we could otherwise support. We want things in our world that are beautiful, that are compelling, that are engaging, that are challenging, that are connecting in many ways. And for that we need to think beyond direct sale to a consumer and create opportunities that serve a wider public and a more socially focused lens.

So why don’t nonprofits capture their full cost back from a consuming audience? There’s a bunch of answers to that. But among them are: arts and cultural organizations are choosing to create work that is larger, more diverse, more different, more technically complex, more innovative, more exploratory than the current market could bear. And that means they want to make it happen anyway. And we want that to happen in our world.

And the other answer is, they ARE capturing back their full cost of operation. They’re just doing it through multiple markets. Certainly they get some income from direct sales to audiences or attendees. But they also get it from passionate advocates and friends and families and corporations and organizations and public sector agencies that also want that work to thrive in the world. They capture their full cost back because they keep going. They keep making payroll. They keep doing business. They consistently deliver work over time. And that makes for a more diverse, engaging, creative, imaginative world for each of us and all of us.

So that’s a quick overview of a nonprofit arts organization, what it is and why it is. It’s a creature of the plural sector. It works alongside the public and the private sectors to create a wide array of experiences for each of us and all of us. And we’ll talk in greater detail on many of these issues in future videos to come. In the meantime, maybe take a look around your own community, find a nonprofit arts organization, and see how you can contribute to its success.