So You Wanna Make a Movie? Do It as a Nonprofit

As a way of furthering their careers, many actors decide to produce a short or feature-length film. As anyone who has tried knows, one of the most daunting tasks facing a would-be independent filmmaker is raising the money. Potential investors know there is a slim-to-none chance they will ever see their money again.

If you're open to it, however, an alternative does exist that guarantees your supporters at least a partial "return" on their "investment." What is that alternative? Making your film through a nonprofit organization.

Most actors don't realize that independent films can be produced using a nonprofit, but they should. As most of us know, the vast majority of theatre companies are nonprofits, and in critical ways, indie film is no different than theatre. The Internal Revenue Service recognizes that, like theatre companies, independent film production companies that are organized to produce or present "dramatic, musical, motion picture, and other performances" can qualify for tax-exempt—or, more colloquially, nonprofit—status. (The IRS is the arbiter of what kind of organizations are tax-exempt.)

What exactly is a nonprofit? It is an entity, usually a corporation, created in order to fulfill an educational or other charitable purpose as defined under Section 501(c)(3) of the Internal Revenue Code. The arts in general, and filmmaking in particular, are classified by the IRS as educational.

Once the corporation is created, it must apply for and obtain tax-exempt status from the IRS before it is considered a charitable, or "501(c)(3)," organization. The application must detail the activities and purposes of the organization. The critical criterion for exemption, which must be described in the application, is that the organization not be "organized or operated" for private benefit or gain. That is, it must be created and run in order to achieve a public, artistic purpose as opposed to a private one. This distinction between a public and a private purpose is the fundamental difference between a nonprofit and a for-profit business.

A nonprofit can be set up to produce one film or many. It must have a board of directors that legally controls the entity. At least some of the directors (ideally, a majority) must be financially and familially independent of the filmmakers. There are additional formalities you may want to discuss with a competent attorney. (Legal service organizations may be able to provide free or low-cost legal counsel in some cities.) In essence, they are all intended to prevent private benefit.

Nonprofits can be like magic for your supporters. Their appeal is that contributions (as opposed to investments) are fully tax-deductible as charitable donations by the contributors. For middle-income contributors (especially those living in high-tax states such as California and New York), the charitable deduction write-off may exceed 40% or more of their contribution. For example, a $10,000 contribution to your film may actually cost the donor just $6,000 after taxes.

Donors of film stock and other equipment and supplies are also entitled to a deduction equal to the fair market value of the items donated. (Unfortunately, donated time and services are not deductible yet, though legislation recently introduced in Congress could change that.)

There is a catch, however, and it is best explained by another analogy to theatre: How many small theatre companies do you know that make a profit on their productions? The likelihood is not very many. Likewise, how many indie films can you name that have made money for their producers or backers?

The catch is that a nonprofit has no owners. Thus, as a practical matter, you're not likely to get rich should your indie film become a hit (but, realistically, would you expect otherwise?). Often the film itself, as well as any profits it generates, will be owned by the nonprofit organization. By law, those profits may not be distributed to the filmmakers as if they were profit participants.

Like all good catches, however, there are exceptions. People who lend intellectual property (such as a screenplay or story concept) to a nonprofit production can receive royalty payments or license fees. In some cases, a nonprofit may even be able to support an independent filmmaker's production and allow him or her to retain full or partial ownership of the film. (This requires that very careful arrangements be in place to avoid self-dealing and conflicts of interest.)

Producing an independent film through a nonprofit production company may not be for everyone. For many, however, the advantages will outweigh the disadvantages. In particular, if your supporters can benefit from the tax deduction their contribution to your movie provides, it may make the difference in acquiring the funds necessary to produce your film. So if raising money is a problem and if simply getting the film made is your primary goal—with less concern about the back-end deal—then using a nonprofit may be just the ticket.

Arthur Rieman (artlaw@pobox.com) is an attorney with the Law Firm for Non-Profits (www.LFNP.com) in Los Angeles. He works exclusively with nonprofits and their founders and board members.