Why You Should Think Twice Before Joining ASCAP, BMI or SESAC – Part II: Non-Profit Nonsense

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In part I of our three part series “Why You Should Think Twice Before Joining ASCAP or BMI, or SESAC” we covered the basics of why you might be better off waiting to join one of the PRO’s. In part II we are going to examine the widely held belief that these performing rights organizations are “nonprofit” entities, and how this fallacy effects they way they both operate. And while we’re un-spinning that, we’ll learn a thing or two about actual nonprofits that might surprise you.

Moses Avalon

On any music business panel where the PROs have a presence this question always comes up:   “Why should I join ASCAP/BMI instead of SESAC?” Reps from both ASCAP and BMI will robotically respond, “Because, unlike SESAC, we’re a nonprofit organization.”

Is that true? If so, does being a nonprofit mean that you, as member will get more cash? What if it was all drivel? All of it. Would that make you leery of other claims ASCAP and BMI make about your benefits?

It’s not too hard to figure out why someone would claim to be a nonprofit; when people think of nonprofits the word “charity” is usually not far behind.  It also  fosters the image  of employees fling coach, eating bag lunches and working tirelessly at a thankless job.

But, in truth, ASCAP and BMI are among the richest entities in the music business.

 

WHAT EXACTLY IS A “NON-PROFIT”?

From the IRS’s point of view “nonprofit status” means one main thing: after you pay all your expenses, any remaining money must be paid out to your members or your cause, thus leaving no “profit” left to distribute to stock holders, or — anyone really. This is true even if you have 99 cents worth of expenses on every dollar you make and give only one penny to your cause, as long as it’s 99 cents worth of legitimate and necessary expenses. [I can already feel the finance geeks out there writing me a detailed technical correction.  Save it! I'm writing this article for musicians, not accountants.]

(There are also different types of “non-profits” –classified as “501 corporations,” by the IRS.  Some are charities and are tax exempt, like a church, but many are not.  We will get to more on that later.)

ASCAP claims to have the highest cost/payout ratio (called a “cost/benefit ratio”) of any PRO in the world—13.5%, meaning that 86.5 cents of every dollar they collect goes to their members. BMI claims on their website their overhead is only 15%, with 85% in royalties being distributed to their members.These are acceptable percentages, comparable to any legitimate tax-exempt nonprofit charity. Save the Children, which pipelines donations to underdeveloped nations, has a similar cost/payout ratio, so it’s no surprise that the PROs would emulate that type of organization.

ASCAP and BMI both claim that after covering their necessary expenses they pay out all remaining money to their members, leaving no “profit” at the end of each year. But, what do the PROs consider “necessary” to spend your money on? A few facts:

 

  • The CEOs of both ASCAP and BMI receive annual compensation well into the low seven-figures. Executives are paid quite well too.
  • Both have offices in prime real estate in Manhattan and Los Angeles whose cumulative rent approaches in the millions per year.
  • Both throw lavish and expensive parties designed to rally new members and give away huge cash awards.
  • Everything above costs each PRO about $100,000,000 a year in “expenses.”

Big parties? Huge salaries? Fancy offices? A hundred million bucks a year in overhead? Does this sound like a charity or any nonprofit you are familiar with? Are any of these expenses truly “necessary” to collect performance fees that are due them by law?

TAX FRAUD AND THE PROs

Now, since many non-profits are exempt from paying income tax, the IRS has the authority to investigate nonprofits that are potentially co-mingling personal expenses with corporate ones. For example: if the CEO lives a $2 Million condo that is owned by the “non-profit” charity.

When they catch one, that company can lose its nonprofit status and be subject to hefty fines and penalties. Yet, would you believe that neither ASCAP nor BMI has ever been stripped of their nonprofit status or paid any fines related to fraud of this nature? Nor are they even remotely threatened by this “outing” that you are reading now. How do they get away with it?

I’ll explain.

BMI and ASCAP reps have told me repeatedly in Green rooms that they are a “nonprofit organization” but their websites and press releases say something a bit different. They state that they are a “non-profit-making” corporation that operates on a “non-profit basis”. BMI’s beautiful on-line brochure uses this term in super bold headliner and ASCAP has their version of “non-profit basis” as well. It almost sounds identical, right? But this is the same kind of semantic distinction the FDA requires of food companies to make on packaging, with phrases like “cheese-food” and “orange juice-drink,” when most of its ingredients are artificial.

Truth: The the ASCAP or BMI you join as a writer/publisher is a standard, typical, run-of-the-mill, garden-variety “domestic business corporation.” They are not classified with a 501c3 status, (The IRS code for a tax-exempt nonprofit) nor do either ASCAP or BMI file an annual form 990 (the tax-exempt non-profit IRS documents).

So the answer to the question of how do ASCAP and BMI avoid jeopardizing their nonprofit status while spending a fortune of their member’s money is quite simple:

Neither of them has ever been a nonprofit corporation nor have they ever asked the IRS to recognize them as such.

Therefore they are not misrepresenting anything to the Government. Only to their members, who often do not know the difference between “tax-exempt non-profit,” regular “non-profit” and “not-for profit,” the last of which is not even an actual IRS term.

But, even if they were classified as legitimate 501c corporations, operating on a “nonprofit basis” is no guarantee that a member will receive more money than with a “for profit” company. In fact, it could easily mean the opposite. It all depends on how they spend your money.

OKAY, SO WE’RE NOT A REALLY “NONPROFIT.”
BIG WHOOP. WE STILL ACT LIKE ONE, RIGHT?

Maybe. In a real tax-exempt nonprofit there are regulations that must be followed about how much the company can filter for expenses. Also the balance sheet of the company is often a public record, so you can see what the CEO and the Senior VPs pay themselves.

But in a nonprofit-like scenario, corporate conscience is their only guide. Since both PROs are, in effect, privately held membership associations, exempt from the public’s prying eyes, we can never know for sure if, when each spends about $100,000,000 a year, it’s all truly a necessary expenses.

One would hope that long before they give away member’s money to their needy executives, they would take care of their own struggling writers first, right?

Unfortunately, the vast majority of their writer members never see annual payments which peak past three figures. Meanwhile, executives have salary bases and annual bonuses that are well into the six-figures. (This information is rarely known by the PRO recruiter you encounter at music conferences.  They earn $25K a year.)

Since how much they spend bears a direct relationship to how much is left for their members, for your consideration, here is a spending comparison analysis between ASCAP and BMI.

 

  • BMI has more offices than ASCAP and more employees. If you’ve ever been to a BMI office in a major city, they are pretty fancy as well. If you like a lean, fiscally unadventurous administration you may prefer ASCAP.
  • BMI gives Advances as an inducement to join with far more regularity than ASCAP. Both call these “expenses”. If you think that giving speculative money to emerging talent is too big a risk to take with your money you may prefer ASCAP’s purist philosophy. If you think it’s way cool that BMI gives up front cash, then go with BMI, assuming they are offering you an advance. See part one for more on that.
  • BMI has tie-in marketing campaigns with industry trades and equipment makers to give their members “free” subscriptions and “discounts.” As you know, there is no free lunch. BMI sponsors these and justifies it as an “expense.” If you think giving up money so you can get a discount on a fancy new Korg Keyboard is ass backward, you may prefer ASCAP’s more conservative, we’re not Groupon, policy.
  • BMI throws (on average) more lavish showcases than ASCAP. They also sponsor songwriting workshops, grants, and scholarships galore for emerging writers. This may sound awesome when you’re just off the bus, but if you think exposing the industry to new talent (other than ones you’re connected to) and thus creating more competition is not something you wish to involuntarily subsidize, you may prefer ASCAP.
  • ASCAP sponsored a “matching donations” campaign for victims of Katrina, 9/11, and others. It also spends millions each year in “outreach programs” to bring music to poor school districts. BMI’s non profit sister company (the “BMI Foundation”) gives away millions each year to other non profit organizations for music programs in underdeveloped areas. If you feel giving your money to disaster charities is a decision that you would like to save for yourself and not subsidize involuntarily, or that charity begins at home, or that teaching a kid in Mozambique how to play the marimba is not what a PRO should be doing with your money, you may prefer SESAC.

More or less this boils down to what role you see the PRO playing in the music industry.  If you believe that they should be philanthropists as well as collection agents then the items above may not matter to you.  But remember…

It’s your money they are giving away before they give you anything.

 

SO WHAT, WE’RE STILL BETTER THAN A
CONFESSED “FOR PROFIT,” PRO RIGHT?

Who knows. As we can see, a very viable argument can be made for the reverse; if you were going to hire a collection agency to get the money you are due, a for-profit model has a far larger incentive to keep their overhead down than a “non-profit-like” one.

Law requires that all US PROs have to operate very similarly to each other. That being the case, wouldn’t it make sense to have your collection muscle remain thrifty?

But, by now, I hope you would be far too sophisticated to consider claims of “non-profitness” or covert attempts to portray ASCAP or BMI as charities, as influencing factors for whom to give your most valuable rights.

In part III of our “Why You Should Think Twice Before Joining ASCAP or BMI,” we will explore the payment formulas of each PRO in detail, and finally answer the burning question: Who pays more?

To receive other parts of this series you should be on my email list.  It’s free.  Just look to the form on the right of your screen.

If you find this information to be useful please take a moment and leave a comment below. If this type of content helps answer some nagging questions and you want more info please consider purchasing a copy of my latest book 100 Answers to 50 Questions on the Music Business.

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12 Responses to “Why You Should Think Twice Before Joining ASCAP, BMI or SESAC – Part II: Non-Profit Nonsense”

  1. CD Schwartz says:

    I’m pretty blown away by all this info. I hoped there was some integrity somewhere in the music business, are there any organizations that DO have a clean bill of “health”?! I agree that they should put more money into helping their own members, as well as under privileged members, not on fancy offices or unrelated charities. The execs can decide to give charity to others if they want from they’re own paychecks, but many artists and writers need that backing to help them become independent. Thanks for sharing this!

  2. Tomas S says:

    For a European like myself this is great information. The PRO’s in the US work quite differently than in my native Sweden, and the basis for their collection is also very, very different.
    This is information I truly value, although it’s frightening reading……

  3. Elizabeth Friedman says:

    Dearest Moses,

    I learn a lot from your postings, but I’m afraid this time I cannot keep quiet. Before going on about how ASCAP and BMI and their “claims” about operating
    as if they were non-profit organizations … I’d ask that you check your facts.

    While I do not know about BMI, ASCAP is charted as a Professional Membership organization ….. thus the name “American Society of Composers, Authors, and Playwrights.” The membership’s primary purpose when founded was to assure that music creators are fairly compensated for the public performance of their works, and that their rights are properly protected. The governing documents can be found at: http://www.ascap.com/members/governingDocuments/pdf/articles.pdf

    I suspect that ASCAP is categorized by the IRS as a 501(c)(6) rather than a 501(c)(3) – so, it would not be a “charity” as you have implied. Mind you though, a 501(c)(3) can be founded and tax-exempt based on its purpose of education vs. outright “charity.”

    A correction is also necessary in that a nonprofit status does not mean that “after you pay all your expenses, any remaining money must be paid out to your members or your cause, thus leaving no “profit” left to distribute to stockholders, etc.” Any “left over money” gets plowed back into the organization via what is called a “fund balance” as the nonprofit status means that monies are not due stockholders (as share holders can not exist in the nonprofit world) or individuals. Thus, any “profit” goes to the fund balance as does any loss add to a deficit in the fund balance.

    According to the IRS (see Publication 557):

    The organization “must operate such that no part of its net earnings will inure to the benefit of any private shareholder or individual and that it is not organized for profit or organized to engage in an activity ordinarily carried on for profit (even if the business is operated on a cooperative basis or produces only sufficient income to be self-sustaining).

    The organization “must be primarily engaged in activities or functions that are the basis for its exemption. It must be primarily supported by membership dues and other income from activities substantially related to its exempt purpose.

    A business league, in general, is an association of persons having some common business interest, the purpose of which is to promote that common interest and not to engage in a regular business of a kind ordinarily carried on for profit. Trade associations and professional associations are considered business leagues.”

    While your take on how the various PRO’s operate and choose to avail themselves has some validity, I think you chastise to the extreme without full investigation. While I also don’t disagree on other points, especially the lavishness, I think you do not point to the important advocacy that all the PROs do on behalf of their membership. Copyright is at the heart of the creative work for one who pursues this line of work and these organizations do quite a bit on a national and global scale that individuals cannot do on their own.

    With respect … thanks for your words and looking forward to Part III!

    • Moses Avalon says:

      Replied to from a mobile device. Pardon the typos.

      Thanks for responding. Three points:

      First point one. I know that the PROs are valuable organizations and I am a staunch copyrightist. If you bothered to read part one of this series, you would see how I praised the PROs and reminded the reader that this criticism should not be taken to extremes or misinterpreted as a detraction about what they do. This series is about gving writers the power of choice. To give them that choice we must un-spin PRO sales pitch bullshit. That’s what this piece is about.

      2). For someone who wants me to check my research, it seems like you need a spoonful of your own advice. If ASCAP/BMI were any type of 501c they would have to file a 990 form and be listed in a public data base of 990 filers. Neither are. They are not real, actual not “non-profits.” Deal with it.

      Feel free to check for yourself. You will find only their “Foundations” listed. Since you are stickler for details I’m sure you’ll agree that the Foundations are not the same as the PRO, even though they have the same name.

      http://foundationcenter.org/findfunders/990finder/

      3) Your re-statement of what a “non-profit” is and what one does is not a correction of mine. It’s saying the same thing–essentially. My readers are not accountants. The description I gave is 100% accurate, to the degree needed in this article. We are not teaching accounting in this blog.

  4. CD Schwartz says:

    My question is, is SESAC better? And if it is, I thought I heard membership is by invitation only, and if you live in the States, it’s also only if you have international cuts, not just in the US. Any response to this? Thank you!

  5. Brooke Mason says:

    Such a timely post given that nonprofit status has been revoked to 275,000 so called charities in California state this year: http://taxdollars.ocregister.com/2011/06/10/irs-revokes-nonprofit-status-of-2222-o-c-charities/85039/ Also see for Los Angeles county alone: http://www.bizjournals.com/losangeles/news/2011/06/09/irs-revokes-nonprofit-status-of-3481-LA.html

    All charities have to follow the rules and I’m suprised by how many I’ve seen pop up that are nothing better than elevated supper clubs running under the guise of doing a good deed. There are standards for nonprofits you can read about here: http://www.bbb.org/us/Charity-Standards/

    It is true that if you are a nonprofit you have to file with the BBB and you’d be surprised who doesnt show up! Look up any nonprofit to check in on these public records: http://www.bbb.org/charity-reviews/national/

    ASCAP is listed as a charity but they are not accredited and they have no report available meaning they have not submitted the required documentation. If they want to do so its as easy as making the submission here: http://www.bbb.org/us/Charity-Enrollment/

    Great post Moses!!

  6. Marilyn Miller says:

    Greed is destroying America! I’m so tired – and so sad – and feeling more helpless and hopeless every day.

    The Media – corporate controlled ghost that it has become – is way beyond derelict in its duty to inform and enlighten us about important issues – or even get the facts straight about anything anymore!

    Thanks, Mo! Please don’t stop telling us the truth!

  7. TIGER M says:

    …But not Non-Cents to ASCAP and BMI! XD

    Thanks for sharing Mo! =3
    How’s it going? =D

    Well I hope!
    Once again a fine review of lessons learned from a wise man.
    YOU! ^_^

    As for “Non-Profit” I think it is awesome that you are shedding some light on ASCAP and BMI for we artists
    but at the same time I understand from a business perspective why these two organizations share this information

    “Non-Profit” as we both know does not mean “no money is made”
    As you said — from a legal standpoint a Section 501(c)(3) Organization
    is Legally a “Non-Profit” organization…
    simply meaning the reason the business has been founded is not for profit.

    *blink, blinks looking at ASCAP and BMI* o.o Duh. lol =3 <-cat-smile
    To be honest… many successful businesses do not start out with the goal of cash in mind. [non-legally and statically speaking many businesses PAY to be in business for the first 2 to 5 years before turning a single dime. Only passion drives that =)]
    Any business body like a human body calls for cash much like our human cells and organs desire blood to continue to keep us alive and in-existence.

    I do not think ASCAP or BMI are lying about their status… Legally speaking they ARE Non-Profit Organizations.
    It is wise in my humble opinion, and speaking only for me–for the businesses to utilize their "legal leverage" as a way to "call-upon-new-clients" [Mainstream Theological Outlooks call to the soul--Wal-Mart calls to saving you money--and so forth]

    Very interesting this subject is currently being covered. ^_^
    I personally am founding a non-profit organization myself [The UnoTenshi Music Project] in order to share with musicians, budding producers, and curious students of our Industry alike–
    the idea of Fair Use, Music shared for Educational and Passionate Purposes and all the "Mystery of The New Digital Audio Workstation" versus the "Luxury of Yesterday's Recording Studios
    [Which I like to give the example of as "The Video Game Arcade versus The Home Playstation Xbox or Wii =3 <-cat-smile]

    "The prime motivation is not money" is all Section 501(c)(3) relays — it did not ever say the company does not make money
    A company does not continue to exist without it! But people who do not see the business side of things only hear what is told
    and often do not research what it really means. LLCs, Joint-Ventures, Corporations [C and S -- public and private], Partnerships and Sole Proprietorships all DO
    go into business with the motive as money.

    I think all ASCAP and BMI are saying is "Hey… legally speaking… our motives are not money."

    Even the reason ASCAP — I'd also say as well as BMI was founded [initially!] — speaks well of the companies.
    Personally I do not think either is an "evil organization" but rather promotes themselves sunny-side-up as virtually all business do! ^_^

    Indeed the article is an ISP tho! =3
    ["Interesting Shared Perspective" XD New term I am using these days]

    Stay ROCKIN' Moses and enjoy the last month of Summer and say Yo' to the fam! =3

    Going to go see mine later on this month — Mother's Birthday this month — and mine too! =3
    I was her "Birthday Gift" as hers is one day before mine ^_^

    Forwarded To This Closed-Space [Yes--Haruhi Ref =3]:

    Forever In Love With All That Which Exists
    (That Which Is Seen & Unseen, Known & Unknown),
    -DJ, Writer, Artist, Musician, Eternal Student & Being of Existence,
    -WAM! TIGER M [Phenomenon Tuesday! ] ( ( ! ~ =D ~ ! ) )
    -2:19 AM (8/9/2011) [Eastern Standard Time, North-of-Equator]

    Who Is TIGER M? O.O
    http://www.tigerm.net

    Angel Arc & Company /\ o /\

    The UnoTenshi Music Project /// ^_^ \\\

  8. How is it possible that . . if you become a “member” neither one of the licensing organization is willing to share their membership list?

    What a scam !

  9. Reticuli says:

    Your definition of non-profit status is a little off. It just means they don’t have shareholders or owners. That’s all. Simple. Doesn’t mean the people working for it don’t get paid or can’t give themselves raises. Doesn’t mean the organization itself can’t spend money to expand itself. All revenue, except those royalties they owe artists, is retained earnings. And the royalties they owe artists are chump change. Such a system will come into being, thrive, and perpetuate itself over time for its own selfish purposes. Like an automaton. And the people affiliated with it become slaves to it: employees and customers, alike. ASCAP. BMI and all the others exist for themselves, and they use the facade of artist protections to keep their racket going. Ditto for record companies, who for whatever their past utilities were, are now outdated. Artists should own their own material, never give up the rights, never license through any of these mafias, and stick to using PledgeMusic and Kickstarter. If a TV commercial or movie uses their stuff without their permission or a band uses their song on their CD without paying or takes credit where credit is not due, then hire a lawyer. These are unneeded, evil middlemen.

    • Moses Avalon says:

      “Your definition of non-profit status is a little off… [It]doesn’t mean the people working for it don’t get paid or can’t give themselves raises. Doesn’t mean..” etc, etc.

      Yeah, I didn’t say it meant any of those things. My definition above is what you ay it is: “leaving no “profit” left to distribute to stock holders.” Re-read it again a bit slower this time.

  10. Gary earl says:

    As usual great stuff. Thanks

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