Date: 2024-12-26 Page is: DBtxt003.php txt00016357
Corporate Structure
Complicated Law
Why this billion-dollar foundation is becoming a corporation ... More philanthropists are putting their money in LLCs. Watchdogs have mixed feelings.
Why this billion-dollar foundation is becoming a corporation More philanthropists are putting their money in LLCs. Watchdogs have mixed feelings.
Laura and John Arnold, worth about $3 billion with more than $1 billion in donations so far, are the latest philanthropists to find that an LLC structure works better. Courtesy of the Arnold Foundation
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Laura and John Arnold aren’t quite as well known as Bill Gates or Warren Buffett, but they’re big names in the world of billionaire philanthropy.
Like Gates and Buffett, they’ve signed the Giving Pledge, a commitment by many of the world’s wealthiest individuals to give the majority of their wealth to charity. Last week, they announced that they’re restructuring the Arnold Foundation to fold it into a new limited-liability corporation, Arnold Ventures.
They’re not alone in going this route. Many modern billionaires have been choosing an LLC as they structure their philanthropy. It’s a move that lets them do more — and leaves some philanthropy watchdogs nervous. Here’s why.
Let’s say you’re a billionaire and you want your philanthropy to do as much good in the world as possible. We’ve previously advised you not to run for president (you can get a lot more political change for your dollar by investing it in your policy priorities) and to definitely set up a foundation. Like it or not (and many people have certainly raised concerns), foundations are highly successful vehicles for influence and flexible ways to do good.
But if you’re trying to do as much good as you can, a foundation might eventually not be flexible enough. That’s because private foundations in the United States are limited under most circumstances to making grants to recognized 501(c)(3) nonprofits — and there are lots of avenues of doing good which that doesn’t cover. (Future Perfect actually falls under one of the exceptions that, under some circumstances, permit foundations to make grants to noncharitable organizations — Vox Media is a for-profit company, but this department is funded by The Rockefeller Foundation.)
That’s driven many prominent philanthropists to structure their giving differently, through limited-liability corporations rather than nonprofits. That’s what the Arnold Foundation did last week, when it announced that it would be combining its philanthropy and political giving under Arnold Ventures.
Laura and John Arnold have a net worth estimated at $3.3 billion, mostly earned in John Arnold’s career running a hedge fund. They founded the Arnold Foundation in 2010 to begin the process of giving it away. They’ve made more than $1 billion in grants so far, which makes them stand out among billionaire philanthropists — not many have been giving away their money as rapidly.
Arnold Ventures marks a new turn for them, one that follows a recent trend among philanthropists. But critics say that the shift toward LLCs isn’t great for philanthropy. They warn that LLCs are less transparent. On the other hand, LLCs do have substantial advantages — and it’s possible to run one with the same transparency as is required of private foundations.
As a new generation of philanthropists begins giving younger in life and wants more control over how their money is used, we can likely expect more and more giving to happen through LLCs.
The limits of foundations
Foundations are broad, flexible tools for spending your money to pursue philanthropy. That’s why they’re so popular among both big-dollar donors and smaller ones.
Major foundations like the Gates Foundation make headlines, drive policy, and save millions of lives; smaller donors can use a foundation to make grants to projects they care about, too, potentially achieving the same effects at a smaller scale. In 2014, there were 86,000 foundations in the United States.
But there are a few avenues for changing the world that are legally complicated — or even impossible — to pursue through a standard foundation. It’s particularly tricky if you want to make for-profit “impact investments” in early-stage projects, like drug development, clean meat, or green energy. Foundations are also limiting if you want to make grants to political advocacy — pushing for policies or supporting candidates that you think are most likely to do good in the world.
It’s no surprise, then, that many prominent philanthropists like the Arnolds are interested in structuring their do-gooding operations differently. Arnold Ventures will spend its money through the Arnolds’ private foundation, their donor-advised fund (an account where you can commit money now, to donate at a later date), and a new 501(c)(4) that permits more direct lobbying efforts.
The Arnolds don’t do much impact investing — that is, making investments in for-profits doing social good, one common reason to prefer an LLC to a foundation. Arnold Ventures is instead restructuring to streamline its political advocacy work alongside its philanthropic work.
They’re not alone. Other big-dollar donors have taken the same approach. Laurene Powell Jobs has an LLC (the Emerson Collective), as do Pierre Omidyar (Omidyar Network), Dustin Moskovitz and Cari Tuna (Good Ventures), and Priscilla Chan and Mark Zuckerberg (the Chan Zuckerberg Initiative).
An LLC is not subject to all the same requirements as a foundation. It doesn’t have to spend down 5 percent of its assets each year, as foundations are required to do. It does not necessitate the same kinds of disclosures of public tax documents. And if any of the LLC’s investments turn a profit, the owners have discretion over what to do with it.
In a cultural moment of increased suspicion about philanthropy, the move from foundations to LLCs can prompt some concern — and some anger. “Charities fear they’ll see less grant making from LLCs than from traditional foundations, and advocates for transparency say LLCs can make it harder to track how the ultrawealthy are spending to meet their social-change goals,” the Chronicle of Philanthropy reported on the Arnold restructuring. (Kelli Rhee, president of Arnold Ventures, told Inside Philanthropy that Arnold Ventures will not decrease spending levels through their foundation.)
But there’s also a strong case for moves like these. Top priorities for the Arnolds, for example, have included retirement policies, pretrial justice reform, reducing the cost of prescription drugs, improving academic research, and stopping predatory higher education practices.
These are, inevitably, political goals. The best way to pursue them will often be supporting ballot initiatives that advance them, backing candidates for office who care about them, and pushing for legislation. An organization that is trying to fix our criminal justice system (a particular priority for the Arnolds) without engaging in any politics is going to be limited in what they can do — and many promising avenues to do good will be closed to them. An LLC allows for both grants through a foundation and politics and advocacy work through a separate organization.
“Such hybrid entities are still outliers in the philanthrosphere,” David Callahan wrote about the Arnold Ventures announcement, “But maybe the real question is not why some top donors are creating outfits like CZI and Arnold Ventures — it’s why more billionaires aren’t creating operations like these.”
Billionaire philanthropy has come under increased scrutiny recently, as part of growing frustration with inequality and the role of money in politics. That’s made philanthropists skittish. (Arnold Ventures declined to speak with me for this piece.)
If you’re a billionaire with limited philanthropic ambitions — or ones that happen to fit well with what foundations make possible — you might want to dodge the added complications of an LLC, which just sounds fishier to the public than a foundation ever will. But if you want to do as much good as you can, then in many cause areas, you will find yourself wanting flexibility a foundation doesn’t offer.
To the extent that billionaires like the Arnolds seem to have moved toward an LLC model for the right reasons — that is, because it’s the best way to solve important problems — hopefully they’ll meet enthusiasm, not condemnation.
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