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Nonprofit

Philanthropy Can Take Form Of LLC Or Nonprofit

By Teresa McLamb, posted Jun 16, 2016
QENO Director Natasha Davis (from left) and The Carousel Center Executive Director Amy Feath talk with Alex Bouknight, audit manager with Bearman CPA about outsourcing The Carousel Center’s finance functions. (Photo by Katherine Clark)

Southeastern North Carolina’s 11 counties currently have 864 groups organized as 501(c)(3) nonprofits with 30,175 employees and expenditures of about $2.1 billion according to the N.C.  Center for Nonprofits. That’s a sizeable impact on the economy, but not nearly the potential impact of the billions available to the Chan Zuckerberg Initiative announced a few months ago by Facebook founder Mark Zuckerberg and his wife, Priscilla Chan. 

The Chan Zuckerberg Initiative (CZI), which promises to spend 99 percent of its Facebook shares during their lifetimes, was created as an LLC rather than a nonprofit or a foundation, making some question whether this might make sense for other nonprofits.

One obvious advantage of the LLC for CZI is personal control versus that of a board of directors such as a 501(c)(3) requires. There’s also the matter of lobbying and policy influence, which would not be allowed with traditional nonprofit status.

“He [Zuckerberg] started the business so he has control and can do what he wants,” said Natasha Davis, director of University of North Carolina Wilmington’s Quality Enhancement for Nonprofit Organizations (QENO). 

“A nonprofit is accountable to a board of directors; nonprofit status says everything belongs to the community. With a nonprofit one person doesn’t own it and call the shots. [Zuckerberg’s] not dependent upon donations. Boards are stewards of the money. It’s the community’s money. In this case, it’s his money,” Davis said.

In a USA Today article, Doug White, who teaches philanthropy at Columbia University, said the LLC structure “can be used very effectively to combine the nonprofit mindset with the for-profit mindset. Is there a movement to solving more intractable problems to include the nonprofit world and the for-profit world as well as government? The answer is yes, and I am glad it’s yes,” White said.

“A symbiotic relationship can be created, and we are seeing a lot of that from younger philanthropists.”

On a strictly local level, Arts Council of Wilmington and New Hanover County Executive Director Rhonda Bellamy said she doesn’t see as much relevance to the arts community. The topic hasn’t come up in recent workshops and other arts conversations in Wilmington and on the state level. 

“I don’t see many correlations between what he’s doing and what I think nonprofits are calling for. An LLC is a different tool, and that works in his case. I think it works for him because he has money,” she said. 

Arts groups and others have to consider whether their donors would disappear without the advantage of a tax deduction for contributions. State and federal taxes and property taxes are also a consideration, she said. 

Another question, she said is does this affect the Supreme Court’s decision regarding whether corporations have rights as individuals as it relates to advocacy.

One local arts business that is making use of an LLC is theArtWorks, which operates under the umbrella of a pre-existing LLC, according to co-owner Betsy Knowles. 

The studio at 200 Willard St. is in a building that Knowles and her husband have owned since 1998. When they purchased the property, they formed the LLC to manage its operation as a manufacturing company. She says they’ve considered changing the corporate structure, but haven’t found it necessary. 

“We understand that even a nonprofit has to make a profit or they’ll go out of business,” she said. “To do things you have to have money left over after operating expenses. If you don’t have extra funds, you can’t help anyone.” 

There are benefits to nonprofit status, she said. For example, nonprofits can get a temporary alcohol license for a fundraiser, which increases their opportunity to make a profit. She also believes people are more likely to contribute to a nonprofit because of the tax laws.

As for the building, Knowles said they “made a determination to use our resources to repurpose the building to benefit the area and the arts community and to enhance the Wilmington community. We had resources we could use, our own assets, so we didn’t have to deplete the resources the nonprofits have for their grants. We had it, and we wanted to share it.”  

At some point, Knowles said, she and her husband may form a nonprofit to manage a project he is incubating that would turn trash into art for the benefit of local young people.

Determining whether an LLC would be beneficial to a nonprofit-minded group could be tricky, but one resource is the N.C. Center for Nonprofits, a membership organization of about 1,500 nonprofits headquartered in Raleigh. 

David Heinen, vice president for public policy and advocacy, said choosing an LLC could be beneficial for any organization for which member activity or property types could expose the group to heightened risk. For example, are hazardous materials used?

Formation of the LLC could be done as an umbrella for all activities, or it could be a member of a standard 501(c)(3) organization, or any combination of other means, he said. 

The LLC protects the other work of the nonprofit. Most typically, LLCs are formed as a related organization to the 501(c)(3), but could be done on their own, he said. The LLC can apply for tax-exempt status, and as long as it meets IRS requirements, would likely be granted it.  

Anyone considering forming a nonprofit would do well to speak to the folks at QENO. Nonprofit status isn’t just for charitable organizations, Davis said. 

There are more than two dozen types of nonprofit corporations including homeowner associations, civic organizations and others.

QENO’s services include coaching, technical assistance and much more with the backing of the university’s resources. 

“Nonprofits are already taking more of a business approach,” Davis said. “They’re businesses with a social mission that are owned by
the community.” 

One idea QENO is looking at is how nonprofits handle financial functions. It has worked with The Carousel Center nonprofit and Bearman CPA firm to improve the center’s financial reporting, streamline financial functions and see if it makes sense to move financial functions outside – an idea, if found successful, could be replicated with other nonprofits. Like other businesses, nonprofits have to market themselves, make sales projections, prove their impact, deal with human resources issues and all the other aspects of a for-profit business.

“When I look at it, the story is less about nonprofits and more about corporate responsibility,” Davis said. “What are our businesses doing to be good citizens? Some of ours are doing amazing things and others are not.”
 

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