Back in November, I attended a symposium called L3C and the Arts at Columbia University in New York City. The event was designed to be discussion around how a new form of incorporation (the L3C) in the US can be used for arts organizations. I Live tweeted the event and the Storify of the tweets from the day can be found below.
Low-Profit Limited Liability Company (L3C) is a form of incorporation that is a hybrid between a for-profit business and a not-for-profit business. It was formed by augmenting the existing Limited Liability Company (LLC. We don’t have the equivalent in Canada; essentially it’s a hybrid of a sole proprietorship and a corporation). The L3C differs from the LLC in that the articles of organization (similar to articles of incorporation in a Canadian Not-For-Profit) must state one of the IRS’s charitable purposes. Because of this, an L3C can receive the money that charitable foundations must give each year (called Program Related Investments, or PRIs).
Basically, an L3C allows a company to accept investment and payout investors while still being able to receive funding from foundations. Champions of L3Cs say that it’s a great way to diversify revenue sources and raise capital to start an organization while critics of L3Cs say the form of organization isn’t so attractive because there isn’t the ability to issue tax receipts for donations.
The L3C and the Arts symposium brought together the co-founder of an L3C organization, a lawyer involved in the drafting of the L3C legislation for several states, the executive director of a theatre arts services organization , the executive director of a theatre organization with an L3C subsidiary organization, and the head of Columbia’s theatre program. After being briefed on the technical aspects of the L3C, the discussion then turned to how the L3C can work in the arts world.
Here’s some main points that brought up for how the L3C can work in the arts:
The L3C is an interesting new tool to consider when forming new organizations, but will not work for all circumstances.
An existing NFP should not change it’s form of organization to an L3C. It should be considered for organizing a new company or a new subsidiary business.
The main drawback for arts companies is the inability to issue tax receipts for donations.
It may be a good form for independent artist and smaller collectives, such as those who use crowd funding sites like indigogo to raise money.
Art forms that have a higher capital potential (like film) may be more suited for the L3C than art forms with a lower capital potential (like visual arts organizations). Performing arts falls between film and visual arts.
I tried to keep a Canadian perspective in mind when listening to the discussion. The L3C form would not work exactly in Canada mainly because Canadian not-for-profits do not rely as heavily on foundation revenue as in the US. But, the discussion on how hybrid forms of organization can work in the arts was quite interesting and applicable for Canadian not-for-profits, especially with the introduction of the hybrid Community Contribution Companies in British Columbia.
In a week of stories involving several Greater Toronto Area charities being stripped of their charitable status, the Toronto Star also published a story by Raveena Aulakh and Amy Dempsey on Tuesday, November 15, 2011 with the headline “Audit of charities encounters resistance”. The article begins by accusing several large Canadian charities of not being transparent because they do not post their audited financial statements on their website and refused to give their statements to an “independent agency that evaluates charities”. This independent agency, Charity Intelligence, also coincidentally was launching their new website on the same day that this article was published. The article also criticized charities for spending too much on fundraising and having too much cash in the bank, then published the names of several organizations deemed to be serious offenders.
I had a very strong reaction upon first reading this article and spent the next few days thinking about how to respond. I was happy to see that Mark Blumberg of the Canadian Charity Law website had posted a reaction to the Toronto Star article. Blumberg agrees that charities must be transparent, but shares many of my concerns with this article. His post is definitely worth a read and includes many helpful links about transparency in charities around the world, non-compliance with the CRA, and CRA fundraising ratios.
Here are the main points that I took issue with in the Toronto Star article (emphasis mine):
Nineteen of Canada’s 100 largest charities do not release their full audited financial statements to the public and refused to provide them to an independent agency that evaluates charities.
Later in the article Greg Thomson, the director of Charity Intelligence, ponders why certain organizations didn’t respond to their request for financial statements.
“There could be a number of reasons,” Thomson told the Star in an interview. “In some cases, it’s not high priority for them . . . others probably wondered who we are. Some might worry that someone will find something.”
Charities are not legally bound to disclose their audited financial statements to the public, but it is considered ethical to do sobecause they take in public dollars, Thomson said.
“If a charity is not transparent, you may as well reconsider donating.”
Charities do disclose their financial data publicly in their annual T3010 filing with the Canada Revenue Organization. Every organization in this country that is a charity has their recent and past (up to 10 years in some cases) financial information available online from the CRA’s website. As Mark Blumberg points out, many organizations release their financial statements, either summarized or in full, on their own website.
Accusing charities of not being transparent because they didn’t respond to a website’s request for statements and then later implying that you should reconsider donating is quite problematic. Of course you should do research into an organization before donating, but just because you can’t find their statements on the charity’s website does not mean there is a serious enough transparency issue that you should not donate. If you have questions into an organization’s finances, ask the organization directly. If the organization is large enough to have a development department, start there. If not, ask the administrative staff or managing/executive director.
One-quarter of the top 100 charities* have enough cash on hand to run their current programs for three or more years without having to fundraise another penny.
[Charity Intelligence] does not advise against donating to charities with large reserve funds but it does tell donors who don’t want their money to sit in a bank account for several years to go with a charity that has a more immediate need.
“Every charity has a cash cushion,” Trypuc** said. “What we’re questioning is how much of a cash cushion they need.”
* “Top 100 charities” as deemed by Charity Intelligence criteria. Mark Blumberg points out, These are not the largest charities in Canada in terms of revenue or assets. These are the 100 charities that have been identified by Charity Intelligence (“CI”) as “Canada’s Major 100 Charities” and as having received the largest fundraising revenue. ** Bri Trypuc is in charge of Donor Services for Charity Intelligence. Yes, Charity Intelligence is also a charity. You can donate to themhere.
Yes, every organization does need a cash cushion. These cushions allow an organization to be sustainable and carry forward with their programming even in hard times. Having a large reserve, however, does not necessarily mean that donation dollars are being squirreled away in the bank. Reserve funds are partly for overall sustainability, but also for larger projects whether they be capital or programming. Reserve funds could also be endowment funds that are actually earned revenue streams via interest. If you’re concerned about where your donation is going, the best way to find out is to ask the organization how your donation will be spent.
Websites such as Charity Intelligence, when used critically, can be very useful tools for deciding where to donate your money, but should not be used on their own. Research into a charity should include sites like this, but should not replace building your own relationship with a charity by asking them questions directly.
Finally, I think one of the most concerning aspects of this article is that it was published on the same day as the Charity Intelligence website launch, however, the article uses no other resources to support its claims. While transparency and direction of donor dollars are important issues, essentially accusing several large organizations of not being transparent and wasting donation dollars to promote a website and organization that is itself a charity raises some interesting questions about transparency and ethics as well.
September 21, 2012: According September 15th’s Canada Gazette (p2662), Charity Intelligence has been sent a notice to revoke their Charitable Status because they haven’t met the filing requirements of the Income Tax Act. (Heard through Charity Village).
