For-Profit Philanthropy Is Eroding the Legal Foundations of Charitable Giving

Alternative vehicles and modes of giving — like LLCs, donor-advised funds and strategic corporate giving conducted in-house — are increasingly eroding elite donors’ reliance on the traditional private foundation. These “for-profit philanthropy” approaches, which transplant practices, players and norms from the business sector into the charitable sphere, appealingly offer donors greater flexibility and privacy than foundations would.

But sidelining foundations also allows philanthropists to ignore the regulation that comes with them and undermines the bargain that enables the rest of us to trust their largesse will serve the public rather than themselves. For over a half-century, the foundation rules have given society input on how elite giving is targeted, imposed a timeline within which it must occur, and mandated transparency around the philanthropic choices of our most influential families and firms. Destabilizing this literal and figurative foundation for philanthropy regulation imperils public trust in philanthropic institutions and their tremendous power to do good.

Philanthropy LLCs as foundation alternatives

The most striking foundation alternative may be the limited liability company, or LLC. Many high-net-worth individuals and families no longer use foundations, but LLCs — the most popular for-profit business form due to their combination of limited liability (of course), extremely malleable governance and favorable tax treatment — as hubs for their philanthropy. When a donor contributes to an LLC formed to pursue philanthropy, the LLC can make cash grants and in-kind gifts, the latter often working together with businesses under their founders’ control. These philanthropy LLCs (for ease of reference, though this term does not refer to any official legal category) can also make impact investments in businesses, and they can even engage in lobbying and campaign activity.

Private foundations can’t. To maintain tax-exempt status and eligibility to receive tax-deductible contributions, a private foundation must abide by strict limits on political activities and restrictions on investment and entanglements with donor businesses. But the differences go well beyond such operational constraints. “Donors” can simply take back the assets they put into a philanthropy LLC, something strictly banned for all charitable nonprofits. And none of the extensive disclosure rules that apply to foundations cover LLCs, so we would never know it if they did.

A philanthropy LLC does not pay taxes. Because of arcane rules, tax laws simply ignore LLCs. Rather, the owner of the LLC is responsible for paying taxes on any income it earns. Likewise, contributions to philanthropy LLCs do not provide donors with tax deductions. But if and when an LLC makes an eligible charitable contribution, donors take deductions as if they had made the donation themselves. Such contributions might be made directly by LLCs to charitable recipients or indirectly through an affiliated donor-advised fund or private foundation. To avoid hefty estate taxes at death, any assets in a philanthropy LLC must ultimately be shifted to one of these tax-exempt charitable recipients.

The best-known philanthropy LLC may be the Chan Zuckerberg Initiative (CZI). But a long list of billionaire donors revealed their creation of philanthropy LLCs both before and after CZI’s very public announcement. How many are there? Nobody knows because they are permitted to remain entirely private.

Donor-advised funds, the not-so-poor man’s foundation

A second example of for-profit philanthropy at work takes the form of the donor-advised fund, or DAF. A donor to a DAF gets an immediate tax deduction. The DAF, however, engages in no charitable activities of its own. It often represents nothing more than an account held by an investment firm, like Fidelity and Vanguard, but also by higher-end firms like Goldman Sachs, which serves as legal owner of the donated assets. Incredibly, that has made DAF sponsors the largest recipients of charitable funds in the U.S.

Donors to DAFs cannot claw back donated assets, as they might from philanthropy LLCs, but DAF assets face no specific timeline for distribution to operating charities. Unlike a foundation, which must distribute 5% of its assets annually for its charitable purposes, assets placed into DAFs may stay there indefinitely. Donors may give advice on how the assets will be invested while they remain in the sponsor’s hands, and on when and to whom they will eventually be distributed. But they need never do so, and can instead merely pass their advising rights on to successors when they die. The sponsor takes a management fee for holding the assets, so has every incentive to seek and hoard large contributions. An unintentional IRS leak in 2016 revealed an astonishing $1.9 billion contribution by Steve Ballmer to his Goldman Sachs DAF, suggesting just how successfully DAF sponsors have done just that.

Strategic corporate giving sidelines corporate foundations

For-profit philanthropy affects the entire spectrum of elite giving, encompassing not only wealthy individuals and families, but also our largest corporations. Corporate giving programs have become fully enmeshed in — ceasing to represent an exception to — these firms’ business strategies. Strategic corporate philanthropy has become just one more tool to seed new markets, develop new products, attract and retain personnel, and ultimately generate profit for shareholders. In the most extreme cases, companies like GM, Google and Pearson have brought philanthropy entirely in-house, dismantling their corporate foundations and redistributing their functions among dedicated corporate social responsibility divisions and human resources, marketing, and research and development departments. In other cases, foundations have been retained and used strategically.

As with philanthropy LLCs and DAFs, the rise of strategic corporate giving comes at the cost of the private foundation. In a now-familiar pattern, it avoids the strictures of private foundation rules and the transparency mandates they impose while preserving tax benefits for corporate donors. Charitable contributions are equally deductible whether conducted through a corporate foundation or not, and corporations can deduct public relations expenses even more easily than they do charitable ones.

Philanthropy law strikes a bargain, with private foundations at its core

U.S. philanthropy law tends to be understood as an incentive for giving. But for elite philanthropy, it in fact represents a bargain. And today, the core of that bargain — the private foundation — has crumbled.

Legislators long ago understood how hard it would be to extract higher taxes from our richest, most influential citizens by eliminating generous charitable tax advantages or closing vast loopholes. And that was in an era with tax rates above 70% and a fully funded — and feared — IRS. Congress settled instead for a modest amount of control, but now enjoys little of either tax revenues or influence over elite philanthropy.

Once a private foundation was the price that the Elon Musks and Jeff Bezoses of the era had to pay to use philanthropy to burnish their often-tarnished reputations. The foundation mandated transparency about donors and activities and circumscribed the timeline for and targets of generosity. Its advent eased decades of public suspicion of elite philanthropy, while continuing to allow donors the freedom to pursue whatever social agendas they desired in autonomous, perpetual institutions.

This bargain proved, if anything, too successful. Even as elite philanthropists forsake the foundation form or use it selectively, public suspicion of elite philanthropy remains low by historical standards. Now that the foundation has lost its power, elites no longer need to pay the price it imposed, not in money — all but meaningless for such individuals — but in lost autonomy.

Opting for for-profit philanthropy does necessitate limited sacrifices. Philanthropy LLCs give up some of the tax advantages of nonprofit forms and they can’t last forever, tax-free, like foundations. Donors to DAFs give up technical control over their assets (though not much when you know Fidelity or Goldman will follow your instructions… and your children’s after you die). Corporate foundations can provide reputational benefits and smooth payouts over time in a way that strategic corporate giving cannot match. Still, given a choice — and we do give them a choice — elite donors predictably opt for flexible and opaque for-profit philanthropy vehicles, a trend we think will only accelerate.

Crafting responses

Which raises the question of how to respond. Elite donors will surely not abandon for-profit philanthropy for a retreat to foundations, but new regulatory initiatives could reinforce public trust in their intentions. We applaud experimentation like the Accelerating Charitable Efforts (ACE) Act to prod commercial DAFs to make distributions from dormant funds. Even more ambitious legislative efforts would attack the question of elite power that makes less transparent and accountable philanthropy so disquieting. Systemic change like Sen. Elizabeth Warren’s Accountable Capitalism Act would attack that power directly and should address corporate philanthropy expressly.

Philanthropists on their own could also use a variety of legal tools to strengthen public trust in their work. Some philanthropy LLCs already take steps to voluntarily embrace transparency. The Omidyar Network has adopted transparency as a core value and publicizes its grants, impact investments and contributions to advocacy organizations. Why not make such commitments self-enforcing by delivering an irrevocable tax election to be treated as a taxable corporation to a watchdog organization? We trust extremely wealthy and powerful individuals, of course, but hope we can be forgiven for wanting a little extra reassurance.

For-profit philanthropy holds the promise to unlock new resources for the public, addressing our most pressing global problems. Yet cataloging the many ways in which it erodes the private foundation and the trust the foundation has long secured should give us pause. New private and public solutions could bolster philanthropic legitimacy in this changing world, and both incremental and more radical responses to ensure trust in philanthropy demand our consideration.

Dana Brakman Reiser and Steven A. Dean are the authors of “For-Profit Philanthropy: Elite Power and the Threat of Limited Liability Companies, Donor-Advised Funds” (Oxford 2023) and professors of law at Brooklyn Law School.

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