What Works—Structures & Understanding Next Gens in Impact
Updated: Apr 14, 2021
Last December, I hosted a panel for the Social Venture Circle and American Sustainable Business Council Conference, “Remaking & Revitalizing the Economy.” With Lori Katz, Nova Impact, and Chelsea Toler Hoffmann, The Keep Families Giving Foundation, we discussed “What Works: Structures & Understanding Next Gens in Impact.” I’m grateful to both Lori and Chelsea for contributing their time and insights on this important topic.
Over the past decade, the social impact space has seen a move away from traditional philanthropic vehicles like private foundations. Private foundations offer tax advantages, but they are highly regulated and are prohibited from funding certain kinds of advocacy and public policy work.
Next Gens Seek Alternative Impact Legal Structures
Many next-generation funders (or “next gens”) are looking for more flexibility than private foundations can provide, and are turning to alternative or hybrid philanthropic vehicles. These vehicles combine traditional business and philanthropic aspects and are designed based on the client’s specific goals. For example, clients will often say, "I have this idea. I'm not sure if it's a nonprofit or for-profit or somewhere in the middle—maybe we need both." That sort of structure is easy to set up and is increasingly common. The Chan Zuckerberg Initiative was established in 2015, which drew a lot of attention for using an LLC as a philanthropic vehicle. LLCs are extremely flexible, and while they lack the tax advantages of private foundations, permit investment in a wide range of social impact businesses. Other options include using a traditional C Corporation or a benefit corporation or other hybrid corporate structure.
Donor-Advised Funds (DAFs), Private Foundations, 501c4s, and More
Other funders establish donor-advised funds (DAFs), which are philanthropic funds held by public charities. Funds contributed to a DAF are tax-deductible, and the funder can generally direct where the funds are to be donated, subject to oversight by the public charity managing the fund.
Of course, many funders still make grants through private foundations, as well as social welfare organizations that are tax-exempt under Section 501(c)(4) of the Internal Revenue Code. Social welfare organizations have more flexibility to fund and engage in public policy and advocacy work, but do not have the same tax advantages as a private foundation or DAFs.
Many family offices accomplish their philanthropic goals by using two or more of these entities. As Chelsea noted in our panel, many next gens are shifting their philanthropic giving to C Corporations, which then house their philanthropic trusts or other entities. Restructuring their family’s philanthropic giving is top of mind for next gens, as they seek innovative ways to maximize their social impact!