M&A Essentials: Making Charity Part of Your Sale– December 13, 2019

Posted by Don Laubacher, CFP®, CPA, AEP® – Senior Vice President, Family Wealth, Sequoia Financial Group

In this installment of our “M&A Essentials” series — offering a fundamental understanding of the concepts, issues and processes every business owner should be familiar with when considering and conducting the sale of a business — we focus on how you can potentially gift a portion of your business to charity, creating a win-win for you and your favorite charity.
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A private company owner’s business is not only an integral part of their life, but often their most appreciated asset. As charitably minded owners contemplate the sale of their businesses, many wonder if it makes sense to transfer a portion of the business to a charity prior to the sale.

In many cases the answer is yes. Since charities typically don’t pay tax on appreciation, giving assets that have increased in value to charity, versus giving cash, is generally a tax-efficient way to make a substantial gift. Donating a piece of the business can offer excellent opportunities for donors and charities alike. However, it’s a complex area that must be approached thoughtfully, strategically and early on.

Start Early

It is critical for a private business owner contemplating a sale to allow plenty of time if a charitable gift might be included. Specifically:

  • The company’s shareholder agreements and other governing documents must be reviewed to understand transfer restrictions;
  • The charity will need to perform due diligence for acceptability;
  • The seller/donor’s advisory team needs time to assess the best strategies; and
  • Sales agreements may need modified to help ensure the charity receives only cash (charities don’t like rollover equity) and is not making any representations or warranties.

Unfortunately, many pre-sale gifts never come to fruition because the idea was raised when sale documents were being drafted and the thought of adding more complexity at a stressful time seemed intolerable. Additionally, the gift to charity must be completed while the terms of the sale are still under negotiation, although having a letter of understanding is fine if the terms of sale aren’t binding.

Every Private Company — and Its Potential to be Gifted — is Unique

Operating agreements, governing documents, ownership percentages, industry differences … there are so many things that make each company unique.

Entity structure also adds to the conversation. Privately owned businesses can be organized as a C Corporation, limited liability company (LLC), Partnership, S Corporation or sole proprietorship. C Corporation stock is generally the easiest to transfer to a charity before a sale. S Corporation stock, especially if the sale is structured as a sale of assets rather than a sale of stock, is often the most challenging, although it can still be done. It’s challenging because charitable owners of S Corporation stock must pay Unrelated Business Income Tax (UBIT) on the income and the gain on the sale of the stock. Therefore, one element to this is comparing the UBIT rate the charity would pay with the tax rate the owner would pay.

S Corporations, as well as LLCs taxed as an S Corporation, have far surpassed C Corporations as the entity of choice for private businesses over the past 30 years. Whether the Tax Cuts and Jobs Act of 2017, which significantly reduced corporate tax rates, will reverse that trend remains to be seen. However, if that were to occur, charitably gifting a portion of a company during a sale may become even more popular.

The IRS May Require an Appraisal of the Business

A donor claiming a charitable income tax deduction for a gift of greater than $10,000 of nonpublicly traded stock (or greater than $5,000 if a partnership or LLC) must obtain a written appraisal from a qualified appraiser to substantiate the value. The appraisal must be obtained no earlier than 60 days before the donation and no later than the due date of the donor’s tax return (including extensions) in the year of the gift. The appraisal is then attached to the appropriate income tax return filing. 

One might ask: ‘Isn’t the sale price the best measure of the value, and can it be used instead of an appraisal?’ Unfortunately, no. Appraisals are case-specific and depend on the facts and circumstances at the time of contribution. For example, if an owner wants to transfer 10% of her company to a charity, then a discount for lack of control will likely apply to those shares. This discount would reduce the tax deduction the owner is entitled to take.

Consider Using a Donor Advised Fund (DAF)

Most charities are not structured, or permitted by internal policies, to accept gifts of privately held companies, even when a sale of the company is imminent. Normally, a better option in terms of flexibility, cost, expertise and tax benefits is to gift the company interest to a charity that offers donor advised funds (DAFs). A DAF is like a personal charitable escrow account, without a private foundation’s burdensome administrative requirements, for the purpose of supporting the charities a taxpayer selects. The taxpayer’s contribution is normally fully deductible in the year of the gift, avoids capital gain recognition and the proceeds within it grow tax-free.

Be sure to compare DAFs because there are important differences. Many of the large charities that administer DAFs, including many of the community foundations and the charitable arms of Schwab and Fidelity have, or will hire, the requisite expertise to handle gifts of private company stock. However, the processes and acceptance guidelines they use, their costs that reduce the donation and the post gift services they offer will vary. It’s worth it to understand the differences. Whether the charity is organized as a corporation or a trust could also be important. As mentioned previously, if the private company stock is an S Corporation, or taxed like one as many are today, the charity holding it must pay UBIT on all income and the gain from the sale of the stock. In this case, using a DAF that is administered by a charity formed as a trust is likely to be preferred to a charity formed as a corporation.


Should philanthropic owners planning to sell their businesses consider making charity part of the sale? Absolutely, if it makes sense within your overall plan. If it is, it’s critical to start planning early, evaluate all the options, discuss strategies with advisors and the experts at public charities, and be mindful of timing issues. Doing so could make transferring an interest in the company to charity a great result for both business owners and the causes they love.

Please contact Don Laubacher at dlaubacher@sequoia-financial.com for further discussion.


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Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.