Have You Considered Giving Away Your Business?
It wouldn’t make sense for most owners, but here’s how it can work for those looking to support a cause they care about.
By Matt Pardieck
Most business owners approach succession by asking who might buy their company. A competitor? Private equity? Their employees? Their children? But there is another possibility: What if you gave the business away?
That is what Eddie Smith Jr., the owner of Grady-White Boats in North Carolina, recently decided to do. With no heirs and more wealth than he needed, Smith transferred ownership of the company to a newly created nonprofit organization. The move may help preserve the company, support causes he cares about, and avoid some of the taxes that can accompany the sale of a highly appreciated business.
It also raises some difficult questions. How much control can a founder retain after making such a gift? Who will govern the company? What happens if future board members reinterpret the founder’s wishes? And why would an owner choose a politically active 501(c)(4) organization rather than a more conventional charitable structure?
Giving some or all of a company away may not make sense for many owners. But for founders whose businesses are worth more than they need to fund their retirement and family needs, it deserves consideration. Here is how the strategy works:
Gifts to nonprofits of highly appreciated holdings such as closely held stock, real estate, and publicly traded stock are a common practice. Not only does it benefit the intended nonprofit, in most cases that nonprofit can sell the holding without incurring capital gains taxes thus enjoying more money to the mission. In the case of a closely held business, a gift of minority or majority interest made prior to a sale can provide significantly more to the nonprofit without tax cost to the founder. However, the amount of the deduction taken by the founder is different depending on the type of nonprofit entity.
When most people hear the term nonprofit, they think of 501(c)(3) organizations: public charities, private foundations, and private operating foundations. A public charity is your local food bank, organizations such as the Red Cross, American Heart Association, or donor advised funds. There are approximately 1.5 million of these entities in the U.S. You can receive a tax deduction of cash up to 60 percent of your adjusted gross income or 30 percent of adjusted gross income for appreciated positions such as stock. These charities require public disclosure via a tax return 990, an independent Board of Directors, and fairly strict governance/conflicts of interest rules to be sure the organization is focused on its mission.
For founders who want flexibility on the ultimate beneficiary of their charitable intent, donor-advised funds allow nearly identical tax treatment but with the ability to send future grants to charities as decided upon by themselves or even their children. For founders seeking more control over governance, a private foundation can be established with less public disclosures and lower deduction limits: 30 percent of adjusted gross income for cash and 20 percent of adjusted gross income for appreciated positions. The 501(c)(3) code provides much versatility depending on the privacy and control over future grants intended by the donor, but they have strict lobbying rules and are not allowed to be involved in political campaigns.
Meanwhile, a 501(c)(4)s are called social welfare organizations and have a different set of rules and tax treatments. There are less than 100,000 in the U.S. and include such organizations as AARP, ACLU, NRA, Chambers of Commerce, and the Rotary Club. From a tax perspective, they are similar to 501(c)(3) organizations in that they usually pay no taxes on the sale of appreciated positions, but both could pay taxes on the income of ongoing business holdings called UBTI (unrelated business taxable income). Thus the biggest tax difference is that contributions to a 501(c)(4) are not deductible to the donor.
Operationally, they are almost a hybrid of a public charity and a PAC (political action committee). They can spend up to 50 percent of their grants to political campaigns, can engage in unlimited lobbying, have no limits on donor contributions, and have no need to disclose the source of their donors. There is controversy over the 501(c)(4) as they have become the primary vehicle for “dark money” in elections. Public form 990 will show whether a 501(c)(4) spends the majority of its grants on political activities or donations to traditional 501(c)(3) charities. A 501(c)(4) also has more flexibility to change its mission in the future depending on its governing documents and state law creating more of a risk of mission changes as Board members rotate.
So what is a founder to do with this information? I think involving nonprofit planning with succession is a wonderful way to combine your “why” into the financials of a transaction. You should do the work to determine “the number” you need to cover your lifestyle. If the value of your business happens to be more than this number, that opens a world of planning opportunities where you can include nonprofit giving, family gifts, other aspirational projects or some combination of all.
For instance, it’s common for family members to be involved in the grant decisions of private foundations, helping the next generation learn many financial, governance, and mission-oriented concepts in the process. All while a founder uses the other aspirational money to invest in startups and maybe act as a mentor. I’m more skeptical in the use of a 501(c)(4) as I believe there’s already too much money in politics. But it is important for all founders to understand the differences and their own goals as they approach the most important business transaction they will experience.
Matt Pardieck is the author of “The Bottom Line of Happiness: Financial and Exit Strategies for the Big-Hearted Business Owner.”
