Charitable LLCs as an Alternative to a Private Foundation?

Take-Away: With the attention given to the 2016 Chan Zuckerberg LLC initiative a few years ago through which Mark Zuckerberg carries out his charitable giving, charitable limited liability companies (LLCs) have been gaining in popularity in recent years as an alternative to the use of a private foundation.

Background: The perceived benefit of using a charitable LLC instead of a private foundation to carry out philanthropic objectives is that a charitable LLC is not subject to the onerous private foundation restrictions and limitations. For example some advantages to using an LLC instead of a private foundation include:

(i) No 5% Distribution Requirement: the charitable LLC does not face the requirement of a private foundation to distribute 5% of its fair market value assets each year;

(ii) No Jeopardy Investment Limits:  the private foundation rule that prohibit jeopardy investments does not apply to a charitable LLC;

(iii) No Self-Dealing Prohibitions: Nor do the private foundation rules that prohibit the self-dealing and impose taxable expenditure limits apply to a charitable LLC;

(iv) No Form 990-PF Filings: A charitable LLC is more private than a private foundation since the charitable LLC does not have to file a Form 990-PF each year for the public to view;

(v) No Attorney General Oversight: A charitable LLC has no attorney general oversight with regard to its administration of assets dedicated to charitable purposes, which is the case with private foundations and other tax exempt entities; and

(vi) Return of LLC Assets to the Members: When a charitable LLC is dissolved and liquidated, its assets can be distributed back to the contributing LLC members, which is not the case with a private foundation.

Flexibility: Therefore, the belief is that a charitable LLC can provide a family that wants to engage in charity in private greater flexibility to allow it to accomplish its goals more easily. This can be important when the family’s proposed charitable activities or initiatives and expenditures are not permitted if it were engaged in through the use of a private foundation.

Tax Implications: Charitable LLCs are generally not set up for tax reasons. Rather, a charitable LLC is intended to be tax neutral. Contributions to the charitable LLC are not tax deductible, in contrast to if the contribution had been made to a private foundation, where the contribution is limited to 20% or 30% (long-term gains) of the donor’s adjusted gross income, with a 5-year carryover of excess charitable deduction. However, the contributions of appreciated stock made to a charity from an charitable LLC will produce an income tax deduction that is based on the stock’s fair market value, thus avoiding the capital gains on the contribution.

• Income Taxes: The income realized from the charitable LLC is not exempt from income taxes. It is a pass-through entity for tax reporting purposes. As such, the tax consequences flow through the charitable LLC to its members. Thus, if there is no dividend income, there is not flow through to the LLC members.
• Estate Taxes: On an LLC member’s death, the charitable LLC membership interest can avoid federal estate taxes by planning so the charitable LLC membership interest, or the LLC’s assets, pass to a charity or some other charitable vehicle, thus qualifying for the federal estate tax charitable deduction.

Conclusion: Admittedly, not too many donors will be interested in establishing a charitable LLC to carry out their philanthropy. That said, a charitable LLC is an interesting alternative to the expense and supervision and administration hassles associated with funding a private foundation. In the end, it is just another option for a wealthy family that is interested in giving to charity, but which wants more control and flexibility than is otherwise associated with a private foundation.