The formation of a nonprofit organization is governed by state law. To take full advantage of beneficial tax treatment at both the state and federal levels, however, a nonprofit needs to go beyond being organized for a reason other than pursuing profits. Whether an entertainment company meets these strict requirements depends on the type of work performed by your organization and who benefits from it.
Role of Profits
The threshold question in evaluating whether an entertainment company can be formed as a nonprofit is whether the business's purpose is to generate profits. By definition, nonprofit organizations are companies formed for business purposes other than generating a profit. This does not mean that the company cannot generate revenue from its activities, but no founder, director, member or employee may be paid dividends beyond reasonable compensation for their services.
Read More: Non Profit Donation Rules
Although the restrictions for forming a nonprofit are not exclusive, to be considered exempt from federal income taxes, and allow donors to deduct donations, your organization must obtain 501(c)(3) tax exempt status from the Internal Revenue Service. This treatment is limited to nonprofits that promote a charitable purpose. The IRS has elaborated that qualifying companies include those that further a specific scientific, educational or religious purpose. Depending on the purpose of your entertainment company, this could be a difficult obstacle to overcome. An example might be if you were organized to offer free documentary film screenings to low-income children.
Your entertainment company also must meet additional requirements outlined by the IRS. First, the organization must not conduct any political lobbying efforts or attempt to influence any piece of legislation or the election of a candidate. For example, your organization could not voice its opposition to a legislator who seeks to limit free speech in the film industry. You also must describe to the IRS how you plan to distribute company assets after your organization stops doing business. By law, the property must be distributed to another tax exempt nonprofit.
The process for establishing tax relief at the state level can vary from state to state. Typically, obtaining the federal exemption automatically qualifies you for the state income tax exemption, but a separate application and review process may be required for sales and property taxes. In Iowa, for example, sales tax exemptions are only granted to organizations furthering an educational or government purpose. By contrast, in Texas most charitable organizations qualify for the sales tax exemption. In addition, some states have specific requirements that must be observed when you are forming your nonprofit. In Texas, for example, you must have at least three directors serving on the board. By contrast, Pennsylvania only requires one director.
- Digital Media Law Project: Nonprofit Organization
- Internal Revenue Service: Exempt Purposes
- Internal Revenue Service: Exemption requirements: 501(c)(3) organizations
- Internal Revenue Service: 3. Section 501(c)(3) Organizations
- Iowa Department of Revenue: Iowa Tax Issues for Nonprofit Entities
- Texas Secretary of State: Nonprofit Organizations FAQs
- Digital Media Law Project: Forming a Nonprofit in Pennsylvania
- Texas: Office of the Comptroller: Application for Exemption
Wayne Thomas earned his J.D. from Penn State University and has been practicing law since 2008. He has experience writing about environmental topics, music and health, as well as legal issues. Since 2011, Thomas has also served as a contributing editor for the "Vermont Environmental Monitor."