Source Theatre founder and artistic director Bart Whiteman yesterday relinquished his title and position at the small nonprofit theater, following months of negotiations with the board of directors. Whiteman has been named producer emeritus. He has been replaced as executive director by actress and director Patricia Murphy Sheehy, who has been acting as managing director since September.

Whiteman, a colorful and often controversial figure who has led the small but prolific 14th Street theater company through 10 turbulent years, was placed on unpaid leave in September after it was learned that Source had presented copyrighted plays without first securing permission and paying authors' royalties.

"Bart is the founder of 10 years' standing, so this has been a very painful and emotional -- even irrational -- process," board chairman Brian Foss said yesterday. Foss said the situation was made even more delicate by the fact that Whiteman lives in an apartment above Source's Warehouse Rep theater and has made several personal loans to the theater. Whiteman's father owns the building that houses the smaller Main Stage.

Under his agreement with Source, which includes an undisclosed financial settlement, Whiteman will continue to inhabit the upstairs apartment and will also have the option to produce plays independently at the theaters on a rental basis.

"It's not a severed relationship, it's an ongoing relationship," Whiteman said yesterday. "Running a theater like Source takes a lot of time, energy and spirit, and I think it's the best thing for everyone involved to let Pat {Sheehy} run it. I've been involved in Washington theater since 1973, and I'm not leaving Washington at the moment -- I've got plenty to keep me busy." Whiteman recently founded a troupe called HBW3 (after his full name, Harold B. Whiteman III), directed Touchstone Theatre's current "Four Men From Annapolis" and is directing "Sci-Fi Cinderella" for a Prince George's County children's theater group.

Ambitious and abrasive, Whiteman's enormously productive theater has weathered both triumphs and traumas. There were hits such as "Equus," "Bent" and "Krieg," the formation of a resident acting company, the founding of A Washington Theater Festival (now in its seventh year), the sponsorship of visiting troupes such as Yugoslavia's Zagreb, and a reputation as a wellspring for Washington acting, directing and technical talent. Whiteman, who once cast himself as a martyred John Brown in "The Holy Terrorist," taught acting and often performed in and directed many of the theater's productions.

The trials of what Whiteman once called the "cliff-hanging existence" of the theater included costly flops, squabbles with unpaid actors and playwrights, a steady turnover of personnel, the loss of the tiny Resource theater space due to unpaid rent, and the company's near-eviction from the 109-seat Warehouse Rep.

Under Whiteman's direction, the perpetually beleaguered Source produced several plays, including Sam Shepard's "Fool for Love" and Tennessee Williams' "A Streetcar Named Desire," without receiving permission from and paying royalties to the dramatic licensing agencies. The revelation last August of these irregularities led to Whiteman's suspension, and the League of Washington Theaters, a group of 14 theaters, chastised Source. Foss said yesterday that Source has since settled its accounts and is again in good standing with the agencies.

After Whiteman's suspension, Sheehy began streamlining theater operations, reducing the number of plays produced, increasing preparation time and attention to production values, and cutting back on theater personnel in order to offer more competitive salaries. "I continue to keep the philosophy that Source is a productive and wonderfully varied place for theater," Sheehy said yesterday. "I would like us to continue raising the artistic standards."

"We went through a period where we were offering 'McSource' -- if you could throw something together, you could be on stage," said Foss, a three-year member of the theater's board. "The problem with this is that you get slammed a lot. We're ready to launch the new Source Theatre. Doing less things better -- that's what our focus is going to be."

Though Foss said the theater is still operating under a $50,000 debt, halved since 1984, he had some good news. Source has received a $10,000 grant from the Cafritz Foundation; a $10,000 grant from the Meyer Foundation for developing a subscription and marketing program; a $6,000 grant from the D.C. Commission for the Arts for this year's festival; and two grants totaling $15,000 from The April Trust, a Washington-based foundation that supports the city's arts and social sciences. The bulk of the April Trust grant is to be applied to an organizational study of Source operations by the Foundation for the Extension and Development of the American Professional Theatre; the remainder will fund a CPA audit of the company, which in turn will clear the way for additional funding sources.