LEGAL STRUCTURES, FINANCE AND FUNDING

A cultural organisations legal structure may often enable or prohibit it obtaining funding from both public and private sources. Therefore, selecting the right structure is important. But your structure can also greatly influence your organisational culture, ability to raise capital finance, decision-making processes and business model.

Selecting an appropriate legal structure if you are establishing a new organisation (or existing organisations considering changing their current structure) could be a key and critical decision for achieving your long-term aims, objectives and vision.

LEGAL STATUS – AN OVERVIEW

Social and cultural enterprises, usually referred to as NGOs (Non-Governmental Organisations), are not defined by their legal status but by their vision, mission and goals. Their legal status is very much defined by the laws of their country and what funding agencies & stakeholders requires. As a result there is a wide spectrum of legal structures under which independent cultural organisations operate depending on their location. No world or regional legal standard for NGOs applies and the legal entity chosen by an organisation depends very much on the norm in their jurisdiction.

However, there are commonalities that can be found because of historical precedent and accepted practice but even here the same type of structure can have regional differences. For instance, an Association in Italy is somewhat different to an Association in France. It is also the case that some organisations opt for a for-profit company while others choose a not-for-profit entity, even though their ethos may be the same, and some have multiple identities. Again this is purely down to what works best in their particular region and circumstance.

To complicate things even further, in some parts of the world many cultural organisations operate outside of any legal structures and this is the case in parts of Asia, Africa, Latin America and even closer to the borders of Europe. Sometimes this is because there are simply no legal mechanisms available or it is not of any benefit to legally register. And in some cases it is safer or easier not to be visible.

To try and make sense of this complicated mix, it can be said that there are four main headings under which NGOs are grouped for legal purposes:

• Unincorporated and voluntary associations
• Trusts, charities and foundations
• Companies (both for-profit and not-for-profit)
• Special NGO or not-for-profit laws

As the world has become more globalised there has also been a huge increase in citizen initiatives, including cultural activities, and this has led to much discussion on how such organisations should be run and developed. It is now a huge sector outside of government and business and its rapid development has meant that is often a struggle trying to operate outside of the more traditional sectors.

There was an attempt by the Council of Europe in Strasbourg to introduce some universality around NGOs. In 1986 the Council drafted the European Convention on the Recognition of the Legal Personality of International Non-Governmental Organizations, which sets a common legal basis for the existence and work of NGOs in Europe. This Convention was never ratified by the European Commission, held up by certain states that were unwilling to sign up to it. It is still under discussion. Article 11 of the European Convention on Human Rights protects the right to freedom of association, which is also a fundamental norm for NGOs and one of the reasons why NGOs often use Associations as their legal form. But support for this ‘third sector’ is not helped by the diverse nature of legal structures that NGOs are often forced to adopt and which often go against the nature of their work and their development.

In short, there are confusions and difficulties around not-for-profit legal structures for NGOs, which vary from country to country. This is especially the case for cultural organisations because their work can cover a wide range of activities and their facilities can often contain commercial activities, for example bars, restaurants, shops, box office sales etc, alongside their non-commercial activities. This often leads to a separation of the legal form of an organisation from their operational base and can result in conflict over who is responsible and who is making decisions. It also leads to multiple legal forms being adopted by many organisations in order to allow them to operate.

The impetus for a cultural organisation to register as a legal entity in the first place usually derives from three main reasons:

To avail of funding. Both public and private funding bodies require that an organisation be formally established with legal and accounting checks and balances.

To legalise in order to have an organisation within the ‘system’ so they can operate and abide by regulations and the law of the land. This is especially the case if an organisation has spaces used by the public, which is usual with cultural organisations.

A requirement to pay tax. Governments, or to be more precise, their Departments of Finance, tend to see tax income as their priority and tend not to differentiate between for-profit and not-for-profit organisations.

In general, governments regulate NGOs and social enterprise, if operating outside of the normal for-company structures, according to:

• The nature of the activities and how they relate to the organisation’s mission
• The use to which earned income will be put
• The source of such income
• The amount of income earned through profit centres in the organisation

NGOs are normally regulated through legal entities that are established for not-for-profit enterprises. These entities and how they vary from country to country are discussed below, but a number of common factors are worth noting.

Being a not-for-profit usually means it is hard to exploit your moneymaking potential and this curtails your self-sufficiency and development. On the other hand governments are all too ready to exploit an NGO for tax, even though it is a not-for-profit company. Quite often cultural centres, for instance, are receiving grants from one wing(s) of government and the same amount of money or more is being paid to another wing(s) of government through income tax, employment taxes, VAT etc.

It is also the case that banks have a problem with NGOs because, in theory, they have to break even every year. This means that NGOs find it hard to get loans (capital) and investment finance.

Both of the above curtail development within the NGO sector and this contributes to the ongoing cycle of grant dependency.

One option is to structure the organisation so that the main mission is held in the not-for-profit legal entity but a separate for-profit company is established to develop the moneymaking enterprises of the organisation, which then transfers any profit made back to the parent company. This was not an option favoured by many governments and local authorities but it is becoming more common (see The Junction, The Beat Initiative and others below) and has the benefit of clearly separating the core activities of the organisation from the profit centres.

GLOBAL EXAMPLES OF LEGAL ENTITIES FOR CULTURAL ORGANISATIONS

Spain

The most common legal structure for cultural organisations in Spain is an Association. This is a not-for-profit organisation. The minimum amount of people needed to form an Association is two: a president and a secretary. The other legal structures possible are: a for-profit company; foundations; cooperatives; SCP (society civil particular) but it is the Association that is common.

Italy

In Italy the most common choice for NGOs is an Association. Italian associations come in all shapes and sizes, some with really huge budgets (i.e. soccer teams, association of industrial company owners...), others are small local groups. In effect, there are two kinds of Associations: those who are recognised officially by the state (i.e. the Red Cross) and Associations that are independent of the state (and make up 99.99% of the not-for-profit organisations in Italy).

To formulate an Association you simply have to write a members charter (which is called "Statuto dell'associazione") where you state how your Association will be run, making sure to include:

Requirements making sure that you will pay taxes (i.e. you state that all members are equal, and that you'll have a written accounting system approved by all members).

You register a copy of your charter (it takes 15 minutes, and 100 to 400 euro)

Then there are many different kinds of Associations, the main differences being around taxation. The more non-profit/civic- based you are, the less taxes you pay and this is defined through a law approved 10 years ago. You pay less tax if:

No money is paid to board members (even indirectly)

Any money or assets remaining if an Association closes down has to be donated to a similar organisation

You cannot have categories of members: they all have to have the same rights in the Association's members chart. In short they all run the organisation.

In reality, this new law has created problems for Associations in that the members charter has to be changed, making all members equal and so creating the same voting rights and control for everyone. But in order to avail of tax exemptions it must be done. This can lead to a few people (sometimes just 10, well organised) taking over an Association (voting themselves) and does happen.

Critics of the Association in Italy trace problems back to the left and the Communist Party, the main promoters of the system of Associations, because of their restrictive practices with regard to earning money, collective memberships and other ‘inhibitors’ to development. This is compounded by local business wishing to stop any competition from Associations (for example, many Associations, including churches, soccer clubs, etc., have a community bar/cafe with cheaper prices for a glass of wine or coffee. These "circoli privati" (private Associations) were, of course, not open to the public but existed just for members. The commercial bars pushed against this and a law was made that you cannot advertise that you have café/bar with signs of any kind e.g. the bar at Buenaventura could not have any signs other than just a sign saying "Buenaventura".

France

The preferred option for NGOs in France is the ASSOCIATION LOI 1901 (which means under law of year 1901 with a non lucrative objective). There was an amendment to this law in 2000, which means that associations are now able to directly have commercial activities within their organisations (restaurant income, tickets sales, rents, selling services...) to finance the non-commercial activities.

 At the moment there is a big debate in France around how culture organises itself, as the French Ministry of Culture has a much-reduced budget. There is a campaign for structures other than Associations based more on a cooperative model.

For example a new structure that is becoming popular is the SCIC (Société Coopérative d'Interet Collectif) and la Friche La Belle de Mai has just transformed into this structure. What this means is a structure that can host many employees, including artists, paid for by the state. This structure is the ‘interlocutor’ for all contracts for public and private services and under this scheme all payments to artists or cultural workers providing such services are paid directly under this scheme. If a cultural organisation becomes an SCIC it can then provide services and pay artists and cultural workers directly under this scheme as service providers.

UK

The two preferred options for not-for-profit cultural organisations in the UK are a Company Limited by Guarantee and a Charity. Most NGOs register as both.

A Company Limited by Guarantee is one in which there are no shareholders and any surplus is reinvested in the company, in other words a not-for-profit company.  The Charity Commission in the UK recommends this type of structure. A Company Limited by Guarantee is a membership organisation and the directors of the company are usually the members as well. But there can be a membership beyond the board of directors. What usually happens in practice is that the directors are the members and are not personally liable for its debts. There has to be a minimum of seven members and a company secretary.

Most organisations also register with the Charities Commission, which provides certain conditions around operation but also gives tax breaks and, along with the Company Limited by Guarantee, allows for funding (grants and donations) and the transparent spending of this funding for public benefit.

There is a new legal structure recently introduced to the UK called Community Interest Companies (CICS). These are limited companies, with special additional features, created for use by organisations who want to conduct a business or other activity for community benefit, and not purely for private advantage, but which have commercial elements. This is achieved by a "community interest test" and "asset lock" (you can’t sell the assets of the company as normal), which ensures that the CIC is established for community purposes and the assets and profits are dedicated to these purposes. Registration of a company as a CIC has to be approved by the Regulator who also has a continuing monitoring and enforcement role.

Ireland

Company Limited by Guarantee (a not-for-profit company) is the accepted legal structure for setting up cultural organisations in Ireland and Arts Council recommended. This Company is based on the UK model and requires seven members and a company secretary to establish.

The Netherlands

In the Netherlands Foundations (Dutch: Stichting) is the preferred legal structure for cultural organisations.

One or more persons can form a Foundation but it is usual to have five to seven persons on a foundation’s board. The board is formally responsible for the running of the organisation but usually everything is delegated to the director of the organisation.

Commercial activities are allowed if they are within the purpose of the foundation and are taxed.

There is a debate about this form of governance in the Netherlands at the moment. Recently a ‘so called’ Code of Cultural Governance was established, with three possible variations on the current foundation model:

• A board more or less running the organisation
• A board at a distance with the director doing most of the work
• A "Read van Toezicht" (Council of 'control') and in this case the director forms the board on his own.

Almost all large cultural organisations have now adopted this last model but the second option is still the most common in smaller organisations.

Asia

Obviously Asia is vast landmass and regions vary enormously when it comes to NGOs and their standing.

In Hong Kong, for example, NGOs are required to register as charitable organisations so that they can apply for government funding or receive "approved charitable donation".  They need to set up a board of directors of no less than three persons, with a secretary and treasurer. Members of the board serve in a voluntary capacity. An annual report and financial audit must be lodged with the relevant authorities.

Cultural organizations, which receive more long-term funding (e.g. 1-3 year grants) from the Hong Kong Arts Development Council or directly from government are required to become a charitable organisation.

But there are other options, which many organisations or collectives opt for, mainly: to register as a society (with the police department) or as a for-profit company. The former is pretty easy, as one needs only three persons to do it.  There are no regulations about whether the members should be paid or not. And they are not required to submit any reports or audits. 

Society registration is obviously a much easier option, especially for small organisations or groups but a problem arises if you wish to avail of funding opportunities.

In Singapore, cultural organisations are usually registered as societies (with a membership base) or as company limited by guarantee (using the UK model).

In many parts of Asia, smaller arts organisations and independent spaces aren't officially or legally registered at all. They are simply run by an individual or a few people. Equally there are many arts organisations registered as for-profit companies (like commercial art galleries).

USA

The USA differs from most other countries when it comes to NGOs simply because there is a huge philanthropic culture in the United States, which gears NGOs towards tax exemption as a primary motive. Private donations are usually the main funding source for most cultural organisations. As a result, registering as a charity under the IRC’s 501(c)(3) is the most common legal option adopted, which is governed by Federal Tax Law. However, then there are state differences and local laws, which affect the running of NGOs.

THE LEGAL STATUS OF CULTURAL CENTRES THAT ARE MEMBERS OF TRANS EUROPE HALLES, THE NETWORK OF INDEPENDENT CULTURE CENTRES

ASSOCIATION

Alte Feuerwache (Koln)

Ateneu Popular (Barcelona - Spain)

Fabryka Trzciny (Warsaw – Poland)

Interzona (Verona – Italy)

Konstepidemin (Gotenborg – Sweden)

Kultuuritehas Polymer (Tallinn - Estonia)

Kulturzentrum Schlachthof (Bremen - Germany)

La Friche la Belle de Mai (Marseilles - France)

L’Avant Rue (Paris)

Les Halles de Schaerbeek (Brussels)

Mains d’Oeuvres (Paris)

Mejeriet (Lund)

Metelkova (Ljubljana - Slovenia)

NOASS (Riga – Latvia)

OZU (Monteleone – Italy)

Pekarna Magdalenske Mreze (Maribor – Slovenia)

Roda Sten (Gothenburg – Sweden)

Stanica (Zilina – Slovakia)

TNT (Bordeaux)

WUK (Vienna)

CHARITY

Beat Initiative (Belfast – Northern Ireland)

Farnham Maltings (Farnham - UK)

The Junction (Cambridge - UK)

Village Underground (London – UK)

PRIVATE COMPANY

A38 (Budapest - Hungary)

Fabryka Trzciny (Warsaw – Poland)

Kaapelitehdas (Helsinki)

Kulturzentrum X-Bau (Nurnberg)

Korjaamo Culture Factory (Helsinki)

Laznia Nowa Theatre (Krakow – Poland)

Moritzbastei (Leipzig)

Parkteatret Scene (Oslo – Norway)

Proekt Fabrika (Moscow – Russia)

Subtopia (Stockholm – Sweden)

Tou Scene (Stavanger – Norway)

Village Underground (London – United Kingdom)

Z-Bau (Nurnberg – Germany)

FOUNDATION

Arena Vestfossen (Vestfossen – Norway)

Melkweg (Amsterdam – The Netherlands)

Moritzbastei (Leipzig – Germany)

P60 (Amstelveen – The Netherlands)

Pro Rodopi Art Centre (Bulgeria)

Rex (Belgrade – Serbia)

NGO

Arts Printing House (Vilnius – Lithuania)

NOT-FOR-PROFIT COMPANY

A38 (Budapest – Hungary)

Beat Initiative (Belfast - UK)

CityArts (Dublin - Ireland)

Farnham Maltings (Farnham - UK)

The Junction (Cambridge –  UK)

ufaFabrik (Berlin – Germany)

Village Underground (London – UK)

PUBLICLY OWNED ENTERPRISE

Verkatehdas (Hameenlinna – Finland)