LLC or 501c3 Foundation? Which One is Right for You?

There are many routes to take when you are a philanthropist running your own private foundation. When it comes to registering your organization, different factors may come into play when deciding if you are going to register it as a Limited Liability Corporation (LLC) or a 501c3. Some well-known philanthropists like McKenzie Bezos and Mark Zuckerberg have chosen not to register as a 501c3 but instead set up their organizations as an LLC foundation. 

There are a number of reasons why one may choose to to use one method of setup over the other. Before deciding which type of foundation you would like to use for your philanthropic endeavors, look into the benefits and considerations of both. 

501c3 Foundation 
Organizations that register for the 501c3 are commonly known as charitable organizations which are used to help the general public. These organizations strictly serve the interests of the public which means no private shareholders or individual’s can benefit from the organization’s earnings. If you are open to the idea of others making charitable contributions to your foundation, you will need to setup a 501c3 foundation, otherwise their gifts will not be considered tax-deductible.

The 501c3 is what many nonprofit organizations strive to adhere to in order to be tax-exempt. This is one of the major benefits of registering as a foundation rather than a LLC Benefits related to tax-exemption include:

• Income tax deductions on gifts up to 20 to 30 percent.
• Limit on investment income tax of 2 percent.
• Protection of assets from estate tax.  
• Access to public and private grants specifically for 501c3 status. 

Those that choose to register as a private foundation should also keep in mind that there are strict guidelines in order to keep their tax-exempt status. Organizations that are registered as a 501c3 tax-exempt organization need to do the following to maintain their status:

• Required to make annual distributions of 5 percent of their previous year’s average net investment assets.
• Must file required tax forms each year with financial statements. 
• Refrain from participating in political activities such as donating to political parties, lobbying, etc.

For more requirements that 501c3 organizations must follow, reference the IRS website on exemption requirements. Contact us if you would like more information on filing for 501C3 status.


Limited Liability Company
A limited liability company operates more within a business structure. This means that there are roles like managers or directors within the organization, flexibility due to less rigid requirements, and limited liability meaning members are not held liable for a company’s debts.   

This vehicle of charitable giving comes with a number of advantages. Many philanthropists have begun seeing this as an ideal opportunity for gift giving because it offers them much more control and freedom than the traditional route. Benefits of a charitable LLC include:

• Control. Philanthropists are able to use their money in different ways than they would if they were registered as a traditional foundation. For example, an LLC is allowed to engage in political-related contributions through lobbying, donations, and advocacy which is something private foundations are not allowed to do. 
• Privacy. The financial background of a LLC does not have to be disclosed. This means there is no publicly accessible information on how much money the organization holds or who it donates to. 
• Entrepreneurship. For those who are interested in diversifying their donations, an LLC gives philanthropists the freedom to disburse their funds in whatever way they would like. For those like Mark Zuckerberg and his wife, Dr. Chan, this means flexibility in investing in for-profit social enterprises.

Overall, the LLC model avoids many of the restrictions that would be in place for a foundation on both state and federal levels making it flexible for philanthropists to engage in activities related to giving and investing that would otherwise be prohibited. However, unlike traditional nonprofit organizations, an LLC does not give you a large tax deduction until the money is donated. In addition, any money the LLC makes is taxable. 

Contact us if you would like more information on filing to start a LLC Foundation.


Alternative Options

There are alternatives to those who are looking for a blend of both or just looking for another way to give to charitable causes.

• L3C: Some philanthropists have taken interest in the hybrid LLC which functions using an LLC structure but works well for smaller nonprofits. Examples of this would be the low-profit LLC (L3C) that is available as a special entity structure in some states.

 

• DONOR ADVISED FUNDS: Another option would be to use a donor-advised fund which is a tax-advantaged charitable investment account used to make contributions to organizations while allowing you to receive tax deductions and participate in making grant recommendations. The benefit is being able to receive tax deductions today for donations you may make later.

 

• CHECKBOOK: You are always welcome to continue to make contributions directly from your checkbook, cash, or online donations and can do so with more spontaneity.  

Please be advised: Blackbird Philanthropy Advisors is not a law group. We do not offer legal advice. We provide general information to help lead you on a course of action.  Blackbird Philanthropy Advisors will provide a referral to you if you wish to have additional assistance on legal matters related to your nonprofit application, entity formation, and bylaws.

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