Limited Liability Companies (LLCs)
Q. How are limited liability companies (LLCs) used in philanthropy?
A. While large, staffed LLCs look like foundations, they have no special tax status. For tax purposes, an LLC is a pass-through and is just an extension of your checkbook. If an LLC makes a charitable contribution, it gets the deduction; if it makes a political contribution or socially motivated investment, it doesn’t.
Q. How are limited liability companies (LLCs) used in philanthropy?
A. While large, staffed LLCs look like foundations, they have no special tax status. For tax purposes, an LLC is a pass-through and is just an extension of your checkbook. If an LLC makes a charitable contribution, it gets the deduction; if it makes a political contribution or socially motivated investment, it doesn’t.
Q. If an LLC is simply a pass-through, why bother setting one up rather than writing checks?
A. Suppose that you have hundreds of millions of dollars dedicated to some combination of gifts, political contributions, and impact investments. Imagine paying staff members, consultants, and miscellaneous bills from your personal checking account, withholding income taxes where appropriate, and the like. The LLC is fundamentally a bookkeeping structure to make all of this easier. Placing assets in a charitable LLC also may help protect them from creditors or in a divorce.
Q. LLCs have been criticized for their lack of transparency. What should I make of this?
A. Putting money in an LLC and later giving it to a public charity is neither more nor less transparent than keeping money in a personal account and later giving it to a public charity.
Q&A with a Wealth Advisor: Sean Stannard-Stockton, CFA, CAP, President and Chief Investment Officer, Ensemble Capital How do you begin a conversation with your clients about giving vehicles and their overall giving strategy?
We start conversations with high net worth donors around their personal and philanthropic goals. Once we’ve established both, we start building out a set of tools—philanthropic vehicles on one side, trusts, retirement accounts, etc. on the personal wealth side—that work together to achieve the client’s combined goals. For instance, consider a donor with children who has a goal of giving to charity during life, leaving money to their children, and passing on to their children their values about wealth and giving. This donor might find that a combination of a charitable lead trust, a donor advised fund, and the involvement of their children in both can ensure that their charitable giving is focused on impact and that they can steward their own wealth successfully.
Q. What trends are you seeing in which vehicles clients are choosing and why might this be?
A. We see more and more people using donor advised funds—especially donors who make meaningful annual donations but are not ultra-high net worth. While private foundations are not necessary if the donor only wants to make donations to nonprofits (and doesn’t need to hire staff, host events, run scholarship programs, etc.), we continue to see strong interest in foundations by donors who desire more flexibility in both their giving and the management of their investments than is offered by donor advised funds.
Q. Are there mistakes you regularly see clients make that you think could be avoided? What would those be?
A. The main mistake is viewing philanthropic and wealth planning as entirely separate. If instead donors treat their investment decisions and philanthropic allocations as part of an integrated strategy, it enables more effective ways to reach both personal and philanthropic goals. For instance, wealthy donors too often create a philanthropic plan only after experiencing a large liquidity event such as selling a company. But by waiting, they lose the opportunity to do philanthropic planning related to the transaction, such as transferring a portion of the company to a giving vehicle prior to the sale, which captures tax benefits that could be used to enhance their personal and philanthropic capital.