Editors’ Note: Dana Brakman Reiser and Steven Dean discuss the significance of the rise of philanthropy limited liability companies, and place it within historical context, based on material from their new book, For-Profit Philanthropy: Elite Power and the Threat of Limited Liability Companies, Donor-Advised Funds, and Strategic Corporate Giving (Oxford 2023).
The history of U.S. philanthropy in the past five decades has largely been a history of tax-exempt entities. But this is changing, and our most elite donors are increasingly practicing philanthropy outside the tax-exempt sphere. We explore these changes, and their ramifications for philanthropy and society in our recent book, For-Profit Philanthropy: Elite Power and the Threat of Limited Liability Companies, Donor-Advised Funds, and Strategic Corporate Giving (Oxford 2023). As its subtitle reflects, philanthropy LLCs are one of several key examples we interrogate. Many high-net-worth individual donors and families are establishing limited liability companies as hubs for giving, in lieu of nonprofit, tax-exempt private foundations. While it is easy to dismiss this development as an arcane legal maneuver of little moment, like other for-profit philanthropic innovations, philanthropy LLCs risk subverting the regulatory system designed to combat philanthropy’s inherent elitism. They demand both attention and action.
For many, philanthropy LLCs entered the public consciousness with the creation of the Chan-Zuckerberg Initiative (CZI) in late 2015. Facebook (now Meta) founder and CEO, Mark Zuckerberg, and his wife, Dr. Priscilla Chan, began CZI with a pledge to give 99% of their net worth during their lifetimes to the organization, to further its mission to “advanc[e] human potential and promote equality for all children in the next generation.” Its mission has evolved to encompass “solv[ing] some of society’s toughest challenges — from eradicating disease to improving education and addressing the needs of our local communities.” Such lofty and laudable goals resonate with those pursued by foundations for over a century. But CZI is not a private foundation. It is neither tax-exempt nor nonprofit. It is organized as an ordinary limited liability company.
Since its inception CZI has been actively engaged in a combination of grantmaking, impact investing, innovative collaborations with partner organizations, and political advocacy. While a single foundation would have difficulty accomplishing this diverse mix of activities, CZI can do and does it all.
- It makes traditional grants to charitable organizations. Early on, it announced it would grant $3 billion dollars over ten years to “to help cure, prevent, or manage all diseases” and started with a $600M grant to fund Biohub, a medical research institution in the Bay Area.
- CZI also has made investments aligned to its mission. Early on, investee firms almost exclusively focused on education. More recently, it participated in a $130 million funding round for Twelve, a company that “converts captured CO2 into products historically made from fossil fuels.”
- CZI is not just a grantmaker or investor, but also runs its own engineering operation designing software to support their mission and their partners: from cell databases to aiding scientific research to dashboards for teachers.
- CZI has also prioritized advocacy, hiring high-profile leaders from both parties. It now reports advocacy expenditures that it makes through its affiliated 501(c)(4) organization on its website. Most focus on promoting affordable housing, immigration reform, and criminal justice reform.
The considerable information available through CZI’s website is admirable, but it is important to keep in mind that it is disclosed voluntarily. We have only the information the Initiative – and any other philanthropy LLC – chooses to share. LLCs are under no obligation to be transparent about their activities.
CZI may have shone a light on the technique, but the Emerson Collective and the Omidyar Network have been using an LLC format for nearly two decades, and high-net-worth families and individuals like John and Laura Arnold and Jack Dorsey have also publicized their adoption of the LLC approach. They are surely not alone. Even elite donors associated with our largest foundations, like Bill Gates and Melinda French Gates, also operate philanthropy LLCs.
The flexibility, control, and privacy the philanthropy LLC offers is too appealing to ignore—a respite from what some see as the regulatory morass of foundation law. When a philanthropic donor opts to use a tax-exempt private foundation for their philanthropy, they accept a series of regulatory limitations on their permissible activities, as well as mandated transparency about their giving and expenditures. These rules would create no impediment to the traditional grantmaking conducted by philanthropy LLCs like CZI. Their restrictions on the nature (I.R.C. § 4944) and size (I.R.C. § 4943) of foundation investments and on transactions between foundations and their leaders and donors (I.R.C. § 4951), though, would make impact investing and co-creation efforts more challenging. Foundation law would effectively ban any advocacy activities that would fall into the categories of lobbying or campaign activity (I.R.C. §§ 501(c)(3), 4945(d)(1)-(2)). It even would impose a timetable on which giving must occur; foundations must pay out 5% of their assets annually (I.R.C. § 4942), while LLCs can pay at any rate and speed they see fit. Foundation law also opens philanthropic activities to public view, by requiring annual disclosures detailing foundation donors, assets, activities and expenditures available to everyone online. And charitable contributions to foundations—like those to all other charities—are irrevocable. Once a donor hands over assets to a foundation, they cannot take them back.
These legal rules were largely created as part of the Tax Reform Act of 1969, which created the tax-exempt private foundation as we know it and enticed elite philanthropists to use it through a compelling bargain of its own. The use of perpetual philanthropic organizations had been condemned by many lawmakers and commentators from the turn of the 20th century through the last debates on the 1969 Act but was ultimately left alone. In the bargain of 1969, private foundations retained organizational autonomy and continued to receive fairly generous tax treatment. The new suite of foundation rules gave society the power to target the largesse of these philanthropists, toward grants to charities and away from politics and business entanglements. It imposed an asset distribution requirement that applied some (albeit limited) timing pressure. Private foundations locked in promises to do good and were subject to transparency requirements to verify their trustworthiness.
Operating as a private foundation today, however, takes tools out of the toolbox that modern philanthropists often see as pivotal. Its governmentally imposed cadence for giving may not match donors’ views on the best approach for when giving will create optimal impact. Irrevocability can uncomfortably constrain donors used to pivoting nimbly, and transparency risks exposing their giving to unwelcome criticism. Using a philanthropy LLC preserves for its founders the full range of techniques to drive social change, gives them room to change their minds, and places them in control of the narrative.
For the donors who make the choice to employ a philanthropy LLC alongside or instead of a foundation, this plethora of good reasons to embrace the LLC are only somewhat tempered by its relative disadvantages. When it comes to income tax, there may be a higher tax burden for using a philanthropy LLC. Unlike the income from a tax-exempt private foundation, the income from a philanthropy LLC will be subject to taxation. With LLCs’ traditional treatment as pass-through entities or—since the advent of the Clinton-era check-the-box regulations—disregarded for tax purposes, its owners will be liable for tax on an LLC’s income (Treas. Reg. § 301.7701-3). But a philanthropy LLC might hold few assets or generate little income, especially if donors select and stage their contributions to achieve this result.
Donations to LLCs will also not qualify as charitable deductions, whether under the income or estate tax. These deductions are available only for donations to tax-exempt, nonprofit entities (I.R.C. §§ 170, 2522, 2055). Still, depending upon the mix of activities in which an LLC plans to engage, the tax impact of utilizing this tool may shrink considerably. When and to the extent a philanthropy LLC uses donated assets for grants to charitable entities, the deduction that activity generates flows through to the LLC’s owner. Staging of contributions can ensure that contributions into the LLC are as well matched as possible with charitable grants out of it.
As income tax deductions for individual charitable contributions are limited to a percentage of the donor’s annual income, these deductions may also not be very valuable to philanthropists at the highest echelons of wealth. Even elite donors with substantial income may have maxed out deductions with prior donations and can again use staging to optimize the deductibility they retain. Moreover, as a 2022 ProPublica investigation demonstrated, many of the wealthiest Americans structure their business affairs to minimize (or even eliminate) their taxable income, and so have little to gain from an income tax deduction.
For these donors, the estate tax may be a more serious concern. For estates valued above the $12+ million exemption (effectively doubled for married couples), this tax quickly reaches a rate of 40%, and assets remaining in a philanthropy LLC at the death of the donor (or the last of a donor couple to die) will be included in their taxable estate. This makes a philanthropy LLC a poor fit for donors seeking a perpetual institution to carry their name and social vision beyond their lifetimes. But if a philanthropy LLC founder spends down all its assets before death to below the exclusion limit, as many philanthropists keen to spend their fortunes in their lifetimes plan to do, the estate tax has no bite. Tax-avoidant philanthropy LLC owners often include in their estate plans a failsafe transfer of their LLC interests to a tax-exempt, charitable entity on death. Given that the estate tax is a perennial target of conservative lawmakers, young elite donors may even wager they will outlive it altogether.
Weighing limited and avoidable tax costs against maximal flexibility, privacy, and control, it is easy to understand donors’ interest in using LLCs. But unmooring philanthropy from the tax-exempt foundation also eliminates important guardrails to target the reach and timing of philanthropy and to make it transparent and durable. Philanthropy, after all, is an inherently elitist activity. It allows the wealthiest and most powerful individuals, families, and firms to create their own social agendas, magnifying their already substantial influence in society. The prophylactic approach of the foundation regulations is designed to ensure foundation funds are spent in service of public-oriented goals, rather than to capitalize donor businesses, burnish donors’ personal or corporate reputations, or influence politics. Their focus on transparency casts light on the agendas foundations select, and irrevocability locks donors into the social obligations they undertake. But these rules were established for a different society facing different challenges in a different time.
New strategies to inject public views on the targeting and timing of philanthropy and to improve its transparency and durability are crucial. In For-Profit Philanthropy, we argue philanthropists themselves have much to contribute. Leading philanthropy LLCs CZI and the Omidyar Network have opened new facets of their LLCs’ activities to public view on their websites, bolstering the comprehensiveness and accessibility of their disclosures over time. This evolution shows great promise, which would be enhanced by enforceability measures like empowering a watchdog organization to file an irrevocable tax election to be treated as a taxable corporation if transparency erodes.
While these examples are laudable, voluntary efforts by elite players operating in opaque organizations are not likely to provide sufficient public voice. Regulation should also adapt, and lawmakers can craft solutions that build on the insights driving trends like the philanthropy LLC. These entities are demonstrating how tools like impact investment and co-creation can unlock impact that foundation law’s strict rules leave untapped. Piloting and studying rollbacks of these regulations would allow us to test how much of this value must be left on the table to avoid the speculation and self-dealing regulators in the 1960s targeted. Modernized regulations might strike a different, but still publicly influenced balance.
-Dana Brakman Reiser and Steven Dean
Dana Brakman Reiser holds a chair as Centennial Professor of Law at Brooklyn Law School, where she also served as Vice Dean. She teaches courses in Corporations, Nonprofit Law, Social Enterprise, Property, and Trusts and Estates. Steven Dean will join the faculty of the Boston University School of Law this fall after being a professor at Brooklyn Law School since 2004, where he also served as Co-Director of the Dennis J. Block Center for the Study of International Business Law. Brakman Reiser and Dean are the co-authors of For-Profit Philanthropy: Elite Power and the Threat of Limited Liability Companies, Donor-Advised Funds, and Strategic Corporate Giving (Oxford University Press, 2023) and Social Enterprise Law: Trust, Public Benefit, and Capital Markets (Oxford University Press, 2017).