Legalizing a Do It Yourself (“DIY”) music venue can be a long and difficult process but it’s the only way to ensure that there will be places of community where the arts are supported and creative endeavors can flourish for the long term. While those wishing to establish a DIY venue may need help from lawyers, accountants, and other professionals, by far the most important aspects of legalizing and running a successful DIY venue are defining what success means and coming up with a mission statement for the venue.
Having a clear vision of what kind of space you want to operate will make it easier for your lawyer to advise you as to what business entity to choose. Your business entity choice will determine how you can raise money and what your tax liabilities will be. In addition, having a clear sense of purpose flows down to fundraising and marketing. Should you wish to raise money initially, it will be easier to get people to contribute to your cause if you can connect with potential backers by communicating what your space will deliver to the community that is unique. It’s also easier to corner a well-defined niche market than compete in a broader over-saturated one.
Once you’ve come up with a mission statement, the next priority should be selecting a business entity. The decision of what business entity to choose revolves around three questions. How much control do you want to have over the operation? How much do you want to protect your personal assets/shield yourself from liability? How do you want to handle taxes? Whichever entity you choose, It will be good practice to open a business account and apply for a federal EIN number. Two rules of thumb that will serve anyone well who is running a business would be, 1) Keep your business and personal accounts separate, and 2) develop an airtight record keeping system, keeping physical and digital copies of receipts as much as you can. Especially in the beginning, keeping track of business expenses will significantly reduce your business’ tax burden.
The business entities that favor control over protection of personal assets from liability are the Sole Proprietorship and the Partnership business forms. The difference between these two entities is that a sole proprietorship involves an individual, whereas a partnership is a joint venture of at least two individuals. No paperwork is required for either entity, however, a partnership may be governed by a partnership agreement that lays out how the joint venture will operate. Should either of these entities be exposed to liability their business and insurance cannot cover, the members would be personally liable for the difference. Any income a sole proprietor or partnership member earns from their business would be included in their personal income tax filing.
Most DIY venues elect to operate as limited liability companies (LLC’s). LLCs retain the aspect of control featured in sole proprietorships and partnerships while protecting each members personal assets from liability. To set up an LLC, a business must incorporate with the state by filing their articles of incorporation with the Secretary of State. An LLC can then draft their Articles of Organization which will govern the relationship among its members and the running of business operations. An LLC can elect to have their proceeds taxed on the individual level of each member, or be taxed as a corporation. Most LLC’s choose to be taxed at an individual level because corporations are taxed twice (once, when the corporation makes money and a second time when the corporation pays dividends to its members). The liability shielding feature of an LLC is what makes this business entity so popular among DIY venues but to take advantage of this feature, there have to be clear boundaries between the LLC and the personal affairs of its members. All business should be conducted using business accounts and LLC members should sign all contracts in their capacity as an LLC member to avoid any liability attaching to their personal assets.
I’ve worked with other DIY venues that have chosen to incorporate as a Nonprofit organizations and obtain 501(c)(3) status from the federal government. Nonprofit organizations offer less control to its principals over how they can operate their business. While a non profit organization can make income, officials within a nonprofit cannot share in the profits of the organization. Also, the nonprofit’s income must substantially be derived from the tax-exempt purpose of the organization. Finally, when the nonprofit organization is dissolved, the assets must be dedicated to the tax-exempt purpose of the group. This often means that these resources have to be distributed to another 501(c)(3) with a similar charitable purpose. The most attractive feature of nonprofit status is the fact that the organizations profits are tax free. In addition, the contributions of those who give to nonprofits are tax-deductible. Organizations that wish to solicit grants from government agencies and private foundations often incorporate as nonprofit organizations because that status is a common requirement for receiving funding from such sources. The requirement that 501(c)(3)’s devote profits to their tax-exempt purpose along with the ability of donors to make tax deductible contributions ensures that resources will be applied to charitable purposes in the most efficient way possible. A nonprofit organization’s officers, directors, and board member’s personal assets are shielded from liability similar to the members of LLC and Corporations.
Making a DIY space legal is not always easy but it is doable with persistence and help. The interest of cultivating a community where artists are supported and nurtured is one that many people are willing to get behind and is what makes these places so special in the communities they serve.