CREATIVE APPLICATIONS FOR CHARITABLE ENTITIES, INCLUDING FOR-PROFIT LLC’S AND CORPORATIONS WITH A NON-PROFIT PURPOSE. Presented by: MICHAEL D. MARTIN Martin, Stilwell & Jones, LLP 1400 Woodloch Forest Drive, Suite 590 The Woodlands, Texas 77380 281-419-6200 281-419-0250 (fax)
Options for sophisticated giving include:
But sometimes “control” and “Hands on Philanthropy” aren’t enough.
Expanding into Social Enterprise.
Private Foundation Endowments Increased in 2009 to $583 Bil. USD
Social Enterprise: Making the Case ~ Foundation Resources; Part of the Private Sector Resource Base
Private sector resources come in two types:
• For-Profit Sector Resources. Market Driven - making money & building wealth - normally require rate of return of +5%.
• Nonprofit Sector Resources.Market incentives are inadequate or non-existent - rate of return of 0 to -100%.
• The Challenge. How to access the vast pools of market driven wealth to invest in ventures that fall into the gap between the 0 and +5?
Social Enterprise: Making the Case ~ Foundation Resources can fund Low Profit Ventures
There are many worthy causes:
• Self-sufficient Under 5%. That can be self-sufficient in the 0 to + 5% zone.
• Return won’t attract Market Capital. They offer a return on investment but the return is insufficient to attract most market driven investors.
• Fall into Low-Profit Zone. They fall into the gap between the for profit and nonprofit worlds – what we call the “Low-Profit Zone.”
• The L3C. The L3C lives in the Low-Profit Zone.
Foundation Endowments Likely to Increase Dramatically in the next Few Years. Why? Answer: the “Perfect Storm!”
• The Federal Estate Tax Scheme. At 39.6% and going higher!
• The Estate and GST Tax Scheme. Likely to return to the pre-Bush tax cut rates.
• The Charitable Deduction Scheme.Encourages charitable giving with significant economic benefits.
Query-Where will Wealthy Clients’ money likely go, if they know its protected, they can control it and get significant tax benefits, not to mention making a contribution to the community?
The Current Income Tax Scheme. Rates are 39.6% and may go higher, due to:
So What can Private Foundations do?
They can make~
What are Minimum Required Distributions and Program Related Investments.
Query-Why haven’t Private Foundations stepped up?
There is a Built in Conflict and Tension between For-Profit and Non-Profit entities:
Query-Why haven’t Private Foundations stepped up? A more detailed answer.
Limitations on Accessing a Private Foundation’s Resources.
The Inherent Conflict of Interest:
The short answer: Yes,but!!!The LLC as Entity of Choice.But not without problems:
The Low-profit Limited Liability Company or L3C; A response to the “for-profit/non-profit” dilemma.
Is a For-profit LLC.But a special kind.
Is State-law Defined. Authorized by state LLC rules.
Provides Asset Protection.The non-corporate form of doing business limits owners’ liability.
Is Taxed as a Partnership.Affords flow-through tax treatment to members.
Provides Governance Flexibility. Both for-profit and non-profit personnel participate in management.
Establish the Jurisdiction, then-
The IRS has not yet ruled on the L3C, however any ruling would only be a “facts and circumstances” ruling on whether a foundation’s investment was a PRI.
Federal legislation would:
Create a Qualification Process.
Create Safe Harbors.
Update the Code and Regulations to require disclosure and annual reporting.
Formation & Organization.Select jurisdiction of choice and follow the rules (NOTE: Local counsel may be necessary).
Governance. L3C Managers will include non-profit representatives (for continuing oversight and to assure that a PRI is used for exempt purposes) and for-profit members (or representatives).
Tax Implications & Compliance. The L3C is taxed as partnership
Exit Strategy. A Private Foundation must always have the unilateral right to withdraw, as a Member, and get its PRI back.
Literally hundreds of L3Cs have been formed since April of 2008 (when Vermont passed the first state law).See outline, Part III, Section H, paragraph 6 for L3Cs in formation or currently operating and two success stories, below.
For-profit Corporation with a Social Mission.
Designed to Receive PRI Funds.
Not Presently State or IRS Sanctioned.But, the process has started. Maryland passed B corporation on May 1, 2010.*
*(See Fifty State Series: L3C & B Corporation Legislation Table, tracking legislative developments at http://ssrn.com/absract=1561783)
The B Corporation Designation. A brand name developed by a non-profit called B-Labs. This group, for a fee, does extensive due diligence on corporate structure, purpose, activities and personnel and issues a “Certificate” which, for a fee, is renewable.
Thank you! Liability Company
I hope that this presentation on L3Cs and their potential use with Foundations has been helpful. If you would like more information, please do not hesitate to call me!
Martin, Stilwell & Jones LLP