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Charitable LLCs

A charitable LLC, such as the Initiative or the Emerson Collective (run by Steve Jobs’ widow) is legally no different from a for-profit LLC. As such, it’s governed only by applicable corporate law, whereas a charity would further be subject to state non-profit statutes (if applicable) and additional oversight by attorneys general and the Internal Revenue Service.

The mechanics for the formation and operation of the charitable LLC are fairly straightforward. The founder creates an LLC and makes a non-binding public declaration (such as Zuckerberg’s Facebook post) to use it for philanthropic purposes. Such a declaration is similar to traditional charitable pledges, which are also generally not binding. The founder can then fund (and make distributions from) the LLC at any time with near total anonymity.

This anonymity is wide ranging. Because the LLC isn’t legally charitable, there’s no requirement to report its charitable activities to the IRS. Money can be withdrawn from the LLC at any time for any purpose with no tax consequences.

There are no restrictions on donations, investments or income and much looser restrictions on political activities than those governing charities. The donor has near total flexibility to change the LLC’s mission or projects at any time and has wide latitude to engage in self-dealing and make charitable use of the resources of any business he may own (this is what, a for-profit philanthropic division of Google Inc., does). And, because the promise to contribute to the LLC is unenforceable, the founder needn’t even follow through on the plan of funding the LLC at all and can unfund it at any time. The LLC’s taxable status also means that its losses can be written off against the donor’s other income.

Source: A Sea Change in High-Net-Worth Philanthropy?

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David R. Duringer, JD, LL.M, is a concealed firearm instructor and tax lawyer specializing in business and estate planning; licensed to practice law in the states of California and Washington. He is managing shareholder at Protective Law Corporation, serving Southern California from its Laguna Hills (Orange County) headquarters and satellite offices in San Diego County (Coronado and Carlsbad).

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