Structuring Your Giving, Part 1: 7 Structural Forms for Donors
Jun 30, 2022
Form Follows Function
One of the key questions that donors often ask as they are gearing up their giving is what is the best vehicle? Do I need a private foundation? An LLC? A donor advised fund? The what, when, where, and who of your giving are all important design considerations when it comes to structuring your approach from a legal and organizational standpoint.
If at all possible, get started with your giving before you finalize the design structures for carrying it out.
Trying out your MVP (minimally viable philanthropy) has lots of advantages before you lock in legal and organizational decisions--but no matter what stage you are at in your giving, this post is here to help you by by reviewing the most common structures through which you can carry out your giving. In an upcoming post we’ll go on to look at key functional questions that will help inform your choices between these options.
Seven Structural Forms for Your Giving
Broadly speaking, there are seven main options to consider as you decide how best to structure your giving. Donor control is far from the only factor you’ll want to consider, but it is often top of mind for those who are planning to expand their giving. So, for the sake of clarity, we’ll go through these, moving from those that offer more control to those that offer less control, whatever their other benefits.
And to be clear, what follows is general and not legal advice, nor can it account for all of your particular circumstances. Everyone’s situation is different. Statutes and IRS regulations are subject to change, sometimes on short notice. For all these reasons, you should thoroughly consult with your legal counsel and other professionals as you make decisions around structuring your own giving.
- Checkbook Philanthropy: You make charitable gifts as direct, personal expenditures. This is the natural starting point for many of us, simply supporting the organizations and causes we choose by making direct contributions from our personal funds. In fact, even for people whose resources have increased dramatically since they began giving, checkbook philanthropy is often still the default setting.
- LLC: You create an entity in the form of a Limited Liability Corporation (LLC), and it carries out your giving program as well as any other business activities you assign to it. This is a relatively recent innovation when it comes to structuring philanthropy. It is increasingly utilized by a number of high profile, ultra-high capacity donors such as Priscilla Chan and Mark Zuckerberg. This approach doesn’t offer a charitable deduction upfront, but when the LLC makes charitable contributions, those tax deductions pass on to the LLC’s owners. The biggest attractions of this approach are the tremendous flexibility and privacy that it offers, as well as providing a layer of liability protection for the LLC’s owners.
- Private Non-Operating Foundation: You create an entity which qualifies for federal tax exemption under section 501(c)(3) but is classified as a private foundation. You vest resources into that entity and make grants to recipients you select. This is a traditional path commonly known as a “family foundation.” It offers full control over the foundation, as well as the opportunity for the foundation to continue operations under the leadership of successive generations of family members. Of course, in practice, a number of high-profile foundations established decades ago by founders like Henry Ford and Andrew Carnegie no longer have any family member involvement. Why doesn’t everyone just set up a private foundation and be done with it? There are limitations for private foundations, such as lower tax deductibility limits on contributions and more restrictions on assets they can receive. Private non-operating foundations also generally have greater liability and an increased administrative burden.
- Private Operating Foundation: You create a private foundation that uses substantially all of its assets to carry out direct service programs instead of grantmaking. This allows you to apply to the IRS for recognition as a private operating foundation. The primary advantage of this status is that donations to an operating foundation are eligible for deduction in the same manner as donations to public charities. Otherwise, operating foundations are generally treated in the same manner as non-operating foundations. This option is typically used by donors who wish to be social entrepreneurs themselves, as it enables them to carry out a specific program to address an issue directly.
- Supporting Organization: You create an entity that functions in close partnership with an existing public charity, typically a community foundation. This allows you to carry out your giving program under the auspices of a public charity. This approach is not widely used because of the administrative and regulatory complexity involved in establishing and maintaining a supporting organization. It also gives the founder less control than they would have with a private foundation. Still, some high-capacity donors have utilized this approach in order to benefit from the increased charitable deduction rate for gifts to public charities as opposed to private foundations. Donors also have the opportunity to be more closely involved in the operations, investment choices, and governance of the supporting organization than is possible through, say, a donor-advised fund (which is the other option for conducting your giving through a public charity).
- Donor-Advised Fund: You make an irrevocable gift of resources to a public charity which assumes full ownership and legal responsibility for these assets. Donor-advised funds are becoming increasingly popular vehicles for giving. Fidelity and Vanguard Charitable are two of the larger players in this space but most community foundations also offer them to donors. The funds are maintained in a segregated account and disbursed to grant recipients at your recommendation. This approach provides administrative simplicity but less flexibility and control.
- Philanthropic Fund: You transfer resources to an intermediary that aggregates funding from multiple donors and carries out its own giving program. The United Way is perhaps the most widely known example of this approach. A number of community foundations also operate in this space, offering “field of interest” funds to donors. In recent years, a whole new generation of pooled philanthropic funds has arisen, such as Blue Meridian, Co-Impact, and the Freedom Fund. Philanthropic funds offer donors a way to address issues that require more resources than they can provide on their own. They may also create opportunities to connect with and learn from those who have greater proximity to and understanding of the complexity surrounding key issues.