LLC vs. Foundation: Which is the Better Option for Philanthropists?
Date:
Jan 8, 2016
In December 2015, Facebook CEO Mark Zuckerberg announced he would transfer 99 percent of his Facebook shares—a sum currently valued at $45 billion—to the new Chan Zuckerberg Initiative, a philanthropic endeavor that will be led by Zuckerberg and his wife, Dr. Priscilla Chan.
The Chan Zuckerberg Initiative LLC raised the question about why some philanthropists choose a limited liability company (“LLC”) instead of a private non-operating foundation (“foundation”) to carry out their mission. The move sparked much discussion about their innovative approach to giving. For philanthropists considering a similar approach, there are several key issues to consider.
In selecting the appropriate entity, at a high level, philanthropists should give thought to their mission and the types of organizations they want to support. Next, it is important to consider the types of assets that will fund their operations, the tax benefits and consequences, the timing of contributions and a donor’s comfort with potential loss of control and fulfillment of disclosure requirements.
Minimizing Taxes – Private Foundation Advantages
If tax minimization is a priority, a foundation is typically preferable to an LLC. Some of a foundation’s tax-exempt benefits include:
- A donor of appreciated marketable securities or cash to a foundation receives an income tax deduction for the value of such a gift up to a 20% or 30% limitation, respectively, of his/her adjusted gross income (“AGI”) with a 5-year carryover for any unused deduction. The transferor of such assets to an LLC receives no such deduction.
- When a foundation sells such securities, it does not pay any capital gain taxes on its appreciation whereas when an LLC, as a pass-through entity, sells such securities, the transferor pays the capital gain taxes.
- A foundation pays an excise tax of up to 2% on its net investment income (“NII”) whereas an LLC’s NII is taxable to the transferor (owner of the LLC) at his/her applicable tax rate which is higher.
- Note: While foundations generally offer more favorable tax treatment for donors, there are certain instances in which LLCs provide a better option. For example, when an LLC donates appreciated marketable securities or cash to a public charity, the transferor (owner of the LLC) receives an income tax deduction up to a 30% or 50% limitation, respectively, of his/her AGI, which is higher than the 20% or 30% allowable deduction a donor receives when transferring assets to a foundation.
Maximizing Control and Privacy – LLC Advantages
While a foundation may offer generally preferential tax treatments, an LLC offers the benefits of allowing the philanthropist to retain a higher degree of control, flexibility and privacy over the entity.
- The founder of a company who transfers his/her company stocks to an LLC may retain the voting rights and control the disposition of such stocks. In contrast, the donor of such stocks to a foundation must relinquish such rights and control to an independent “special representative.”
- An LLC may choose whether and when it makes charitable donations whereas a foundation must expend an annual minimum of 5% of its assets for charitable purposes.
- An LLC may freely invest in high risk for-profit companies with unknown returns whereas a foundation needs to consider the prudent investor rule, avoid “jeopardizing investments” and investments that may lead to unrelated business income taxation when making investment decisions.
- An LLC has no disclosure requirements whereas a foundation files an annual 990-PF return with the IRS, which is available for public review, to report its balance sheet, grant making and the names and salaries of its officers, directors, managers and top five paid employees.
Finally, an LLC may engage in lobbying, policy advocacy and political contributions to approach social issues whereas a private foundation is prohibited from these activities.
While philanthropy may initially appear uncomplicated, it is a complex process with multiple considerations. It is important to enlist the support of experienced tax and estate planning professionals who work through these issues with clients on a daily basis and can advise on the most effective plan.
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Disclosure
CTC | myCFO is a brand delivering family office services and investment advisory services through CTC myCFO, LLC, an investment adviser registered with the U.S. Securities and Exchange Commission and a Commodity Trading Adviser registered with the Commodity Futures Trading Commission (“CFTC”), and a member of the National Futures Association (“NFA”); trust, deposit and loan products and services through BMO Harris Bank N.A., a national bank with trust powers; and trust services through BMO Delaware Trust Company, a Delaware limited purpose trust company. Family Office Services are not fiduciary services and are not subject to the Investment Advisors Act of 1940 or the rules promulgated thereunder. The information contained herein should not be construed as personalized investment advice, and should not be considered as a solicitation to buy or sell any security or engage in a particular investment strategy. Private Asset Management magazine is a financial services industry trade publication.
CTC | myCFO is a brand delivering family office services and investment advisory services through CTC myCFO, LLC, an investment adviser registered with the U.S. Securities and Exchange Commission and a Commodity Trading Adviser registered with the Commodity Futures Trading Commission (“CFTC”), and a member of the National Futures Association (“NFA”); trust, deposit and loan products and services through BMO Harris Bank N.A., a national bank with trust powers; and trust services through BMO Delaware Trust Company, a Delaware limited purpose trust company. Family Office Services are not fiduciary services and are not subject to the Investment Advisors Act of 1940 or the rules promulgated thereunder. The information contained herein should not be construed as personalized investment advice, and should not be considered as a solicitation to buy or sell any security or engage in a particular investment strategy. Private Asset Management magazine is a financial services industry trade publication.
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About Susanna Poon
Ms. Poon joined CTC | myCFO in 2015. She is responsible for delivering comprehensive family office solutions to individuals and families of substantial wealth and specializes in philanthropy, trust and estate planning. She also counsels clients on sophisticated tax saving and wealth preservation strategies. Ms. Poon works with clients to help them develop their charitable goals, set up and maintain private family foundations and donor advised funds, and negotiate charitable gift agreements. Prior to joining CTC | myCFO, Ms. Poon was a practicing attorney for nine years specializing in estate and philanthropic planning. She earned a BA in political science and a BS in communication studies from Boston University, where she graduated magna cum laude. She earned her JD from the UCLA School of Law. Ms. Poon is a supporter of Full Circle Fund, a network of members who give their time, talent and connections to help Bay Area nonprofits.