If you are running an impact charity or a small impact solar energy business, you need to know all the ins and outs of government compliance when you get those grants Charitable giving isn’t just about dropping extra change in a donation jar or saying “yes” to a prompt at the cash register to tag […]
The post Charitable Vehicles for Families: Foundations, Funds, and LLCs appeared first on Green Prophet.
If you are running an impact charity or a small impact solar energy business, you need to know all the ins and outs of government compliance when you get those grants
Charitable giving isn’t just about dropping extra change in a donation jar or saying “yes” to a prompt at the cash register to tag on a dollar for a good cause. These practices are often categorized as “checkbook” philanthropy because they concern individuals writing a check, so to speak, after they’re prompted with an appeal for donations. This is a noble way for individuals to decide if some of their disposable income might find better use addressing an urgent cause.
But there’s another kind of philanthropy that’s more organized, strategic, and impactful, one that involves choosing a vehicle through which charitable activity is conducted. In this guide, we’ll take a look at three common charitable vehicles, weighing the benefits and tradeoffs of each—private family foundations, donor-advised funds (DAF), and limited liability companies (LLCs) used for philanthropic purposes—so you can determine which vehicle is best suited to put your family’s values into action and build a legacy.
Private Family Foundations
Private foundations are nongovernmental, nonprofit organizations often funded by a single source—typically an individual, family, or corporation. They’re tax-exempt under Section 501(c)(3). The Council on Foundations (CoF) reports that around two-thirds of all private foundations are family-managed. This is what people mean when they say “private family foundation,” which isn’t a distinct legal entity from a private foundation, but rather a way a private foundation is managed.
For instance, a private family foundation would be funded by members of one family and remain under the management of at least one family member. According to the CoF, “in many cases, second- and third-generation descendants of the original donors manage the foundation.” This makes the private foundation an ideal charitable vehicle for families who want to make a long-term philanthropic commitment with a deep involvement in how their charitable dollars are spent.
What makes private foundations attractive is the high level of control they offer. Families can define the mission, decide where grants go, hire staff, and manage investments. As for responsibilities, private foundations must distribute at least 5% of their assets annually to charitable purposes. They also must fulfill their administrative requirements, like filing IRS Form 990-PF each year and paying an excise tax on investment income.
Pros:
- Control: Full authority over investments, grantmaking, staffing, and mission. Families can determine how assets are managed, what causes to support, and who is involved in the decision-making.
- Legacy: Designed for long-term, multi-generational involvement. Successors can be named and integrated into the foundation’s governance, creating continuity between your family’s values and future generations.
- Versatility: Foundations support a relatively wide range of charitable activities, including international giving. Private foundations can also run their own programs directly.
Cons:
- Cost and Complexity: High upfront costs and ongoing expenses must be expected in private foundations, as well as legal, accounting, and administrative requirements.
- Regulatory Burden: Annual filings, detailed reporting, and compliance with distribution rules may become burdensome.
- Excise Tax: A 1.39% tax on investment income reduces total funds available for grantmaking. It’s minor, but worth factoring in for long-term planning.
| Common Misconception: “Private foundations are a way to shield wealth from taxes indefinitely.” Not quite. Private foundations have to distribute at least 5% of their assets annually and pay an excise tax on investment income. They’re subject to strict IRS regulations, and they’re monitored for compliance. |
Donor-Advised Funds (DAFs)
A donor-advised fund (DAF) is a great choice for families who aren’t interested in the administrative and managerial responsibilities of a private foundation. A DAF is an account that allows donors to contribute assets and recommend grants, while the fund is ultimately managed by a sponsoring charity (often a financial institution). In other words, the donor retains advisory power, while the sponsor retains control of the fund.
DAFs are a good fit for families of donors that are looking for simplicity, streamlined recordkeeping (since you don’t need to keep track of every gift acknowledgement), and tax efficiency without losing say in how their contributions could be used. For instance, you could recommend that your donations be used as a source of long-term funding for any IRS-qualified public charity.
Some people enjoy the anonymity that DAFs make possible while donating to causes, but DAFs can also be established in your family’s name. To that end, you can recommend successors to build and maintain a legacy of giving while the sponsoring charity handles all compliance, investments, and distribution. Once a contribution is made to a DAF, you receive an immediate tax deduction.
Pros:
- Immediate Tax Deduction: Contributions are deductible in the year they’re made, even if grants are distributed later. That timing flexibility makes DAFs a useful year-end tax planning tool.
- Low Maintenance: The sponsoring organization manages compliance, accounting, and investments, which means families don’t have to. There’s also no need to form a separate legal entity or file annual tax returns. It’s as close to hassle-free philanthropy as you can get.
- Tax-Free Growth: Assets in a DAF can grow without being taxed, increasing the pool of funds available for future grants.
Cons:
- Limited Control: As a donor, you only have advisory power over a DAF. Final decision power rests with the sponsoring charity. Typically, donor recommendations are approved, but there’s no legal guarantee.
- No Mandatory Payout: Unlike private foundations, there’s no minimum annual distribution requirement. Funds can sit idle for years unless the donor takes initiative. This makes it easier to delay or avoid actual charitable activity.
| Common Misconception: “Aren’t donor-advised funds just tax shelters without any oversight?” DAFs are regulated by the IRS and managed by sponsoring organizations. While donors recommend grants, the charity holds ultimate control over funds, ensuring they’re directed to charitable causes. |
LLCs Used for Philanthropic Purposes
Unlike foundations and DAFs, LLCs that are used for philanthropic purposes are not tax-exempt entities. They’re for-profit limited liability structures that some families and high-net-worth individuals use to pursue their goals, like grantmaking, political advocacy, and impact investing, without the constraints of traditional nonprofits. While sometimes informally referred to as “charitable LLCs,” this is a bit misleading—these entities aren’t charities in a legal or tax-exempt sense. What distinguishes them is their ability to blend financial returns with social goals in one flexible platform.
The primary appeal is control and range. LLCs can make grants to nonprofits, fund political campaigns, lobby lawmakers, and make equity investments—all under the same structure. These activities are more constrained under a 501(c)(3) foundation. As such, LLCs are often used by high-net-worth individuals or families who want to engage in more nontraditional and flexible forms of philanthropy.
But this flexibility comes at a tax cost. LLCs are typically taxed as “pass-through” entities, meaning any income the LLC generates is passed directly to owners, shareholders, or investors and reported on the members’ personal tax returns, regardless of whether that income is actually distributed. Likewise, LLCs don’t offer the same upfront tax deductions as the other models. Deductions would only apply if the LLC itself donated to a qualifying charity, not if a contribution was made to the LLC.
Pros:
- Flexibility: LLCs aren’t bound by nonprofit restrictions and can engage in lobbying, for-profit investing, and political giving. That makes them a powerful tool for donors who want to influence systems to address philanthropic and business concerns.
- Control: Owners retain full operational control without oversight from a board or nonprofit regulator.
- Privacy: LLCs don’t have to file public disclosures like Form 990. Salaries, grants, and investments can be kept private, which may appeal to families who value privacy.
- Tax Strategy: While not tax-exempt, LLCs offer flexibility in how losses and gains are handled. Impact investment losses can be used to offset other income, while profits can be recycled into future projects.
Cons:
- No Upfront Tax Deduction: Donors only receive deductions when the LLC gives to a qualifying 501(c)(3), which adds a step and limits immediate tax benefits. This may be a concern for families with near-term planning needs.
- Tax Exposure: Income from the LLC flows through to members and is taxable, even if it isn’t distributed. That means donors could face tax bills on earnings they don’t actually receive.
| Common Misconception: “LLCs can’t serve charitable purposes.” They can, just not in the conventional, tax-exempt sense. For philanthropists seeking charitable and commercial impact, the LLC may be the only model that offers both. |
Choosing the Right Structure
There’s no “best” charitable vehicle—it depends on your family’s goals, tax situation, and appetite for control and complexity. Private foundations are ideal for families who want to be hands-on, create a lasting legacy, and directly shape how charitable funds are used, but they do require significant administrative work and costs. Donor-advised funds are streamlined, cost-effective, and tax-efficient, but they offer less control and may require donor initiative to maximize charitable outcomes. LLCs offer maximum flexibility and privacy, but they don’t provide the same tax benefits and require more coordination to be effective.
Families often combine structures to meet their needs. For instance, a DAF can support regular grantmaking with minimal effort, while an LLC can handle impact investing or other activities that a traditional nonprofit can’t. As your charitable vision grows or as your interests shift, the vehicles you use can shift too.
| Common Misconception: “Once you choose a charitable structure, you’re locked in.” You’re not. Structures can be reconfigured, expanded, or adapted over time to align with new goals or tax strategies. |
About the Author
Bo Parfet is Head of Growth at DLP Capital, a 5+ billion-dollar company, and a 3X author, speaker, and mountaineer. He received his MBA from the Kellogg School of Management at Northwestern and a Master’s Degree in Economics from the University of Michigan. Among his mountaineering adventures, he’s climbed the Seven Summits and K2, and is embarking on an endeavor to ski down Mount Everest to raise money to bring eyesight to 100,000 blind people. He lives with his wife and two sons in Boulder, CO. You can find him on other social media platforms @boparfet.
Disclaimer: Statements are those of Bo Parfet only and are not guaranteed, nor should such statements be relied upon. Forward-looking statements are expressions and beliefs of Bo Parfet and should not be relied upon.
Past performance is not a guarantee or indicator of future results. The information provided is for informational purposes only and does not constitute a recommendation, an offer to sell, or a solicitation to buy. Investment decisions should be made based on your individual financial situation and objectives. Please consult your attorney, tax advisor, or financial professional before making any investment.
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