Unit 5: Choose your philanthropic partner

[Alicia_Schmidt]

Note: These materials were prepared by Pledge 1% and its legal counsel, but these materials do not constitute legal advice. When choosing a philanthropic partner that will receive, manage and distribute your funds when your equity pledge is executed, we suggest that you review the considerations described in the chart below and  consult with your legal counsel. 

There are 4 common vehicles for managing the proceeds from your equity donation:

Donor Advised Fund (DAF)	Nonprofit Corp - Public Charity	Nonprofit Corp - Private Foundation	Fiscally Sponsored Project
Company funds a donor advised fund (“DAF”), the “Company X Fund” at a large, existing nonprofit corporation that is tax-exempt under Internal Revenue Code Section 501(c)(3) and that is  “public charity.”  An example would be the Tides Foundation.	Company sets up a new nonprofit corporation and applies for tax-exempt status under Section 501(c)(3).  Company intends to fundraise and ensure that the new nonprofit receives at least one-third of its support, over time, from a wide-variety of donors -- not just the Company and its key officers and shareholders.	Company sets up a new nonprofit corporation and applies for tax-exempt status under Section 501(c)(3).  Company does not intend to fundraise, and the new entity will be a private foundation.	Company sets up a fiscally sponsored project at an existing 501(c)(3) public charity, like the Tides Center.

And four common considerations when choosing a philanthropic partner including:  What do you want the recipient charity to do with the donation? How much control and flexibility do you want? Do you want to fundraise from outside of the corporation? And are there other tax considerations?

	DAF	Nonprofit Corp - Public Charity	Nonprofit Corp - Private Foundation	Fiscally sponsored project
I.  Activities -- What do you want to do with the donations
Domestic grants to charities	Easiest solution if this all you want to do	Yes -- but requires maintaining and operating a legal entity	Yes -- but requires maintaining and operating a legal entity	Not typical
Grants to individuals and scholarships	Not allowed (with limited exceptions)	Yes -- but requires maintaining and operating a legal entity	Yes -- but requires maintaining and operating a legal entity and requires IRS pre-approval of process	Not typical
Foreign grants	Allowed with extra expenditure responsibility requirements or an opinion of foreign public charity equivalence	Yes -- but requires maintaining and operating a legal entity	Yes -- but requires maintaining and operating a legal entity AND extra expenditure responsibility requirements or an opinion of foreign public charity equivalence	Not typical
Matching grants to charities	Yes	Yes -- but requires maintaining and operating a legal entity	Yes -- but requires maintaining and operating a legal entity	Not typical
Direct charitable programs  Investment in a for profit social enterprise  Recruiting fee if hire candidates sourced by social enterprise	No	Yes	Yes	Good vehicle if you don’t want to operate your own legal entity but want to do programs not just grants and are willing to cede control to sponsor organization
Event sponsorship	Can sponsor events, but avoid any benefits to donors, such as tickets or tables at meals	Yes, but any benefits, such as tickets or tables at meals, should be treated as an asset of the charity	Can sponsor events, but any benefits, such as tickets or tables at meals should only be used by Foundation officers, directors, staff, and volunteers	Yes
II. Control:  How much control and flexibility do you want?
Level of control	You advise on grants, but do not control	Company can appoint and remove board of charity and effectively control -- outside donors may be reluctant to donate to company controlled entity without outside directors	Company can appoint and remove board of charity and effectively control  -- most control	Sponsor has ultimate control, but Company has some control via fiscal sponsorship contract
Flexibility to move funds	Company can usually move funds to a different DAF sponsor or to a controlled public charity, but not to a private foundation	Funds can be moved to a DAF, another charity, or a private foundation	Funds can be moved to a DAF, another charity, or, with a bit more difficulty, to another private foundation	Funds can be moved, via contract, to another public charity, private foundation, or DAF
III. Sources of Funding: Do you want to fundraise from outside of the corporation?
Company as donor or C-Suite Executives and shareholders as donors	Easy vehicle for this	Works well, assuming charity can satisfy the 1/3 public support test by having other donors as well	Yes, but Company should donate stock or cash, not warrants as the exercise of the warrants may be self-dealing	Yes, good vehicle for giving if the vehicle otherwise makes sense for activities
Fundraising from individuals	Yes, but individuals may be reluctant to give to company branded DAF; normally only works if the gift is unrestricted as to purpose	Yes, good option for this	Individuals can, but normally will not, give to a private company foundation	Yes, good vehicle for giving if the vehicle otherwise makes sense for activities
Fundraising from other DAFS and private foundations	Yes	Yes	Does not work well	Yes
IV. Taxes
Company contributes its own shares	Deductible at fair market value (see note below on valuation) and against up to 10% of Company’s net income	Deductible at fair market value (see note below on valuation) and against up to 10% of Company’s net income	Deductible at fair market value (see note below on valuation) and against up to 10% of Company’s net income	Deductible at fair market value (see note below on valuation) and against up to 10% of Company’s net income
Company contributes warrants in company	Deductible at fair market value when exercised and against up to 10% of Company’s net income	Deductible at fair market value when exercised and against up to 10% of Company’s net income	Should not be donated because of the self-dealing rules	Deductible at fair market value when exercised and against up to 10% of Company’s net income
Individual contributes company shares	Deductible at fair market value. (see note below on valuation) and against up to 30% of the donor’s AGI (taking into account other donations during the year as well)	Deductible at fair market value. (see note below on valuation) and against up to 30% of the donor’s AGI (taking into account other donations during the year as well)	Deductible at fair market value only if publicly traded stock subject to no restrictions and against up to 20% of the donor’s AGI (taking into account other donations during the year as well)	Deductible at fair market value. (see note below on valuation) and against up to 30% of the donor’s AGI (taking into account other donations during the year as well)
Individual contributes cash	Deductible against up to 60% of the donor’s AGI (taking into account other donations during the year as well)	Deductible against up to 60% of the donor’s AGI (taking into account other donations during the year as well)	Deductible against up to 30% of the donor’s AGI (taking into account other donations during the year as well)	Deductible against up to 60% of the donor’s AGI (taking into account other donations during the year as well)
V. Other Considerations
Costs/Fees	DAF usually takes a 1% administrative fee	Separate legal entity requires startup costs of approximately $20,000 plus ongoing legal, accounting, and staffing	Separate legal entity requires startup costs of approximately $20,000 plus ongoing legal, accounting, and staffing	Fiscal sponsors typically take a fee of between 5% and 15% on property and money donated to project
Staffing (Integration between company and social impact efforts)	Company may not pay staff or consultants through a DAF	Typically public charity has its own staff, but Company can make a grant to pay staff	Company can pay to staff the separate entity with its own employees, separate employees, or some combination.  Often, a Company will staff at its own expense so that its employees can get company benefits and stock options	Company provides the staff; can pay its own staff or can have staff become staff of the project sponsor and pay from project funds
Time efficiency	Very efficient; minimal admin; can be more time consuming for non-traditional grants	Efficient because of control, but admin takes time	Efficient because of complete control, but similar to DAF for international gifts	Efficient for direct programs
Branding	Yes	Yes	Yes	Yes

1. Note:  The fair market value of shares that are publicly traded and unrestricted is the average of the high and low values on the day of donation.  All other shares have to be appraised by a valuation expert, and IRS form 8283 is required.
2. Note: for 2021 only, the 10% of income deduction limit for companies is set at 25%, and the 60%  individual limit for gifts of cash (only) to a public charity (not a DAF) does not apply.

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