One of most well-known and respected bloggers on philanthropy, Sean Stannard-Stockton, launched a new venture on August 31: Tactical Philanthropy Advisors. Sean intends to operate as a B Corporation, but his site shows that he considered the nonprofit form. Here's his explanation of why TPA ultimately chose a for-profit structure:
We chose a for-profit legal structure because we believe doing so gives us a competitive advantage in hiring the very best client advisors. In addition, a significant element of value to our clients is our ability to leverage our deep philanthropic networks to source the knowledge our clients need. We feel that we are better able to navigate networks of large foundations because we are operating as their peers rather than as potential grantees.
Tactical Philanthropy Advisors is committed to advancing the field of philanthropy. We believe our service benefits the public because we help our clients maximize the effectiveness of their giving. Even though we have not requested tax-exempt status, our fees are in line with leading nonprofit community foundations that offer similar services. We are a “double bottom line” company that tracks financial and social impact performance and strives to maximize both. We are committed to the idea of knowledge sharing in the philanthropic sector and seek to aggressively share any reports, information or practices we create with the public.
TPA gives me an excuse to take a brief (read, noncomprehensive) look at the decision-making process that might have been involved.
- How will the enterprise be controlled and governed?
- What will its capital structure look like (including its access to capital, its use of capital, and its redeployment of profits)? Will the enterprise seek donations, investors, or both?
- Will its operations be transparent?
- What are the desired tax attributes?
- What are the stakeholders' risk tolerances?
- Ability to receive deductible contributions
- Ability to receive foundation funding
- Perceived trustworthiness
- Consulting practice operational limitations
- Commerciality doctrine:
- Organization may be operated only insubstantially in furtherance of a non-exempt purpose;
- An activity may be in furtherance of a non-exempt purpose if engaged in a manner that is considered commercial.
- Commerciality factors include
- Competition with for-profits;
- Business model focused on generation and accumulation of profits;
- Commercial-like business and marketing practices;
- Service to the general public as opposed to a discrete charitable class;
- Lack of donative support.
- Commerciality doctrine:
- Limitations on insider transactions (even if ultimately beneficial to the organization)
- Limitations on lobbying and electioneering
- Inability to raise equity capital
- Reduced recruitment capacity due to compensation limitations
- Operational flexibility
- No limitations on insider transactions
- No limitations on lobbying and electioneering
- Ability to raise equity capital
- Enhanced recruitment capacity due to ability to offer compensation competitive with other for-profit enterprises
- Taxable (but for social enterprises making little profit, this may not be a very substantial con)
- Inability to receive deductible contributions
- Lesser opportunities to receive foundation funding (but grants and PRI's are possible)
- Perceived as less trustworthy (but B Corporation designation or L3C structure may mitigate this con)
TPA provides advisory services to (1) high net worth donors (including setup, administration, and ongoing advice for private foundations and donor advised funds); and (2) wealth managers, estate planners, CPAs, and family offices to help them better serve their clients' philanthropic needs. Similar services are certainly provided by for-profit competitors, but also by 501(c)(3) community foundations. So, there were options here regarding choice of entity.
Ultimately, TPA chose the for-profit form but with an exhibited commitment to solving social problems. First, TPA plans to get the B corporation designation by meeting comprehensive and transparent social and environmental standards, institutionalizing stakeholders' interests in the governing documents, and paying a license fee to B Lab, a 501(c)(3) nonprofit. Second, TPA has committed to supporting several volunteer efforts that support the social sector, including Philanthropic Ventures Foundation and the Alliance for Effective Social Investing. Third, TPA has committed to donating 1% of its revenues to the TPA Fund for Advancing Philanthropy, a nonprofit grantmaking organization in the startup phase. So, TPA will soon be a B corporation with an affiliated nonprofit. We're sure to see more of these arrangements in the future.
For more information on the commerciality doctrine, see Protecting The Church's Tax-Exempt Status: Avoiding Violations of the Commerciality Doctrine by David O. Middlebrook, Esq.