LLC Vs. Foundation: Which is the Better Option for Philanthropists?

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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