United States: Corporate Philanthropy: To Give Is To Receive

Last Updated: October 23 2014
Article by Peter T. Beach and Russell J. Stein

According to a recent study, 64% of the companies surveyed contributed more to charitable causes in 2013 than in 2010.1 Many companies, large and small, public and private, incorporate philanthropy into their operations. For instance, in 2013 Walmart and the Walmart Foundation contributed over $1 billion in cash and in-kind gifts to charitable organizations,2 and we know from our own client base that corporate philanthropy is a staple of business life in New England and other parts of the U.S. When we refer to "corporate" philanthropy in this article we include all forms of business (LLCs, partnerships, etc.), not just corporations.

Companies looking to "give back" to their communities have never had as many options as they have today. Corporate philanthropy can take many forms: cash and in-kind donations to worthy charities, employee volunteerism, company sponsorships, and company foundations. There are also various ways to implement a corporate philanthropy program ranging from individual efforts of a company founder or officer, to setting up formal grant-making committees and employing a full-time "Chief Giving Officer." Some states, including Vermont and Massachusetts, have even enacted laws establishing new corporate structures called "benefit corporations" that allow a company to consider charitable issues in addition to profit in their decision making processes.

Deciding where to begin may be daunting given all the choices, but the first step in establishing a company philanthropy program is probably the most obvious step – determining what the company wants to accomplish from the program. Benefits from corporate philanthropy include bettering a community or a cause that is important to the company or its owners as well as tax deductions. Corporate philanthropy programs can also have indirect effects such as increasing a company's goodwill with its customers and community.

Once a company establishes what it wants to do, the next step is to determine how much time and resources the company wants to commit to its philanthropic efforts.

Direct Company Contributions. Certain types of programs, such as direct cash and in-kind contributions, give companies flexibility in deciding the level of resources they want to commit. Starting an effective giving program can be as simple as finding a charitable cause and making a monetary donation. Of course, even these types of programs can expand dramatically, in which case the company might create a committee to analyze various charities to determine which are best suited for donations and even ask charities to submit applications for grants. The company could also link donations to certain sales promotions or other company activities.

Corporate Foundations. Other types of programs, such as setting up corporate foundations, can generate long-term effects and permanency since a foundation is generally a separate legal entity. There are three primary types of corporate foundations available: grant-making private foundations, private operating foundations, and public charities.

Grant-Making Private Foundations. The most common form of corporate foundation is a grant-making private foundation. A grant-making private foundation generally just makes grants to other charitable organizations, rather than performing charitable services itself. Then those other charitable organizations use the grants to provide charitable services to the public. Grant-making private foundations are subject to special rules under the U.S. income tax code that, among other requirements (notably including limitations on so-called self-dealing) require the foundation to distribute a certain amount of money each year to qualified charities or else become subject to an excise tax.

Private Operating Foundations. Unlike a grant-making private foundation, a private operating foundation devotes most of its resources to the active conduct of charitable activities. For instance, a private operating foundation formed to help disadvantaged children learn to read might organize teachers and volunteers to actually go into schools or organizations and create and operate programs teaching children to read, whereas a grant-making foundation would provide funds to other charitable organizations that actually conduct the activities. Accordingly, a private operating foundation generally has higher over-head costs than a grant-making foundation. A private operating foundation is not subject to an excise tax on the failure to distribute income.

Contributions made to either a grant-making private foundation or a private operating foundation are tax deductible, subject to certain limitations, however a private operating foundation has more generous rules relating to a donor's deductibility of charitable donations than a grant-making private foundation has. Both grant-making private foundations and private operating foundations are also subject to certain income taxes related to investment income and are subject to complex regulations relating to the types of transactions that can be entered into.

Public Charities. The third type of entity is a public charity. A public charity generally has to rely on monetary contributions from a broad range of donors, not just from one source, in order to retain its public charity status. Therefore, public charities are not often used in corporate philanthropy programs.

When creating any philanthropic program, keep in mind that state agencies also regulate charitable activities. In most states, the Office of the Attorney General regulates charities. For instance, in New Hampshire the Charitable Trusts Unit of the New Hampshire Department of Justice oversees charities. These regulators oversee issues such as annual charitable registrations, professional fundraisers, commercial co-ventures and charitable sales promotions. Simple ideas such as having a company team up with a charity to raise money can implicate a variety of regulations, and if not carefully planned, they can result in fines, bad publicity, and an overall loss of charitable benefits. Even trying to set up a raffle or a "casino night" to raise money for a worthy cause may involve a variety of state and local agencies. On top of all of this, each state regulates charities independently and possibly differently from other states. So if a company is planning on a corporate philanthropy program that is national in scope or spans across multiple states, it will have to keep track of various state regulations as well as federal regulations.

Most companies that establish corporate philanthropy programs find that both the tangible and intangible benefits from the program far outweigh the costs and efforts involved in setting up and maintaining the programs. This article just touches on basic issues relating to corporate philanthropy. If you are considering implementing a corporate philanthropy program, or would like to expand or consolidate your current efforts, please contact us. Our firm has substantial experience in this area, both through clients we represent and managing our firm's own philanthropy program, and we will be happy to walk you through the considerations and options.

Footnotes

1 The study was conducted by CECP, formerly known as the Committee for Encouraging Corporate Philanthropy. CECP was formed in 1999 by Paul Newman and a group of business leaders in order to call upon companies to respond to the needs of their communities. Giving Numbers in Brief report, http://cecp.co/images/2014_Summit/1000px-CECP_FINAL.png (last viewed August 4, 2014).

2 Walmart 2014 Annual Report, page 66.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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