OCTOBER 04, 2020
If you seek maximum flexibility in your philanthropy, consider bypassing the tax-exempt route and forming a for-profit limited-liability company (LLC). The benefits of LLCs in charitable work are numerous: wider latitude and diversity of spending opportunities, less regulation and red tape, and augmented privacy and control.
Because LLCs are designed and governed by their donors, they can typically avoid the common threats to donor intent. In fact, they are ideal vehicles for donors committed to spending down their financial resources in their lifetimes. Their managers are employees, not the independent directors of a foundation. Moreover, LLCs can be terminated, and their assets transferred, any time their donors wish.
The Chan Zuckerberg Initiative
Facebook Founder Mark Zuckerberg and his wife, Priscilla Chan, chose this vehicle in 2015. Declaring their intention to donate 99 percent of their Facebook shares to charitable causes in their lifetimes (an estimated $45 billion pledge when it was made), they formed an LLC (the Chan Zuckerberg Initiative) to accompany the existing Chan Zuckerberg Foundation (a private non-operating foundation) and the sizeable donor-advised fund which the couple has funded at the Silicon Valley Community Foundation. Philanthropic LLCs are popular with other Silicon Valley powerbrokers as well, including Pierre Omidyar, Steven Ballmer, and Laurene Powell Jobs, widow of Apple founder Steve Jobs.
In early 2019, John and Laura Arnold announced the restructuring of their philanthropy as an LLC, Arnold Ventures, which overarches the private Laura and John Arnold Foundation, the Arnolds’ donor-advised fund, and their 501c4 Action Now Initiative. So why Arnold Ventures? For philanthropic work around issues such as criminal justice, health care, school performance, and public finance, says President Kelli Rhee. Although grants to c3 nonprofit organizations will continue to come from the private foundation and donor-advised fund, “We realized that in order to create change that lasts, we would need to remove barriers between data and decisive action, working swiftly across the policy-change spectrum,” Rhee explains.
Advantages of philanthropic LLCs
“Flexibility” is one word to summarize the advantages of philanthropic LLCs over traditional foundations:
- They are not subject to annual distribution requirements.
- They give donors the latitude to invest in domestic and foreign for-profit ventures. For example, Powell Jobs’ Emerson Collective bought a majority stake in The Atlantic magazine in 2017. The Omidyar Network has invested in Flutterwave, an African payment processing company, which it believes will improve African standards of living while operating as a business.
- When program staff are employed by an LLC (rather than by a c3 entity), they can move seamlessly from c3 to c4 to for-profit work—a significant advantage for donors using an LLC in conjunction with a donor-advised fund or private foundation.
- Donors can use LLCs to fund ballot initiatives, direct lobbying, political campaigns, and individual candidates—prohibited expenditures for private foundations.
- Donors can use LLCs to support foreign charities without a mandate to determine that such organizations are the equivalent of Section 501c3 public charities (as required of private foundations).
- In contrast to a private foundation’s tax return, LLC filings do not have to be public.
- LLCs permit donors to dedicate valuable chunks of their enterprises to philanthropic purposes without endangering their ownership of their businesses. Zuckerberg, for example, would have been gradually forced to relinquish control of Facebook if he and Chan had donated stock to their foundation rather than to an LLC, because of federal tax law forbidding excess business holdings.
- Through an LLC, donors may make aggressive and concentrated investments without running afoul of federal “jeopardizing investment” or state “prudent investor” rules.
- LLCs are not subject to the “self-dealing” rules applied to private foundations, so donors can structure their operations and compensation plans in ways that integrate their philanthropy with their business. (Donors who are using both LLCs and non-profit philanthropic vehicles do need to be alert to those rules, however.)
Downsides to philanthropic LLCs
If you choose this route, keep in mind these caveats:
- You won’t enjoy a tax deduction for any funds donated to your philanthropic LLC, and income generated by your entity will also not be tax exempt. One step you can take to mitigate this negative is to write off on your personal tax filings funds donated to charitable causes through your LLC. Carefully coordinating contributions to and distributions from an LLC can minimize the amount of taxable income that will be generated.
- Unlike foundations, LLCs cannot pass to future generations without incurring estate taxes. Donors who choose to transfer assets from an LLC to a tax-exempt vehicle (such as a private foundation) should consider making that transfer at a time when they can still take an active role in the governance and grantmaking of the new entity, in order to put in place the recommended policies and procedures to protect donor intent.