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Using LLCs in Fiscal Sponsorship: 3 Detailed Responses to Questions

This blog post is a follow-up to a talk on the use of limited liability companies (LLCs) in fiscal sponsorship that Greg Colvin and I gave in a recent Foundation Center webinar. This presentation focused on a new concept called "Model L” fiscal sponsorship. In this post, I’ll focus on three interesting questions asked by the audience.

Greg and I first conceived of Model L primarily as a way for a Section 501(c)(3) public charity engaged in fiscal sponsorship to help shield itself from potentially unlimited tort liability, where a sponsored project wants to engage in particularly risky activity, and where a more attenuated form of fiscal sponsorship, such as the Model C grantor-grantee relationship, was not appropriate or desirable. In the course of setting up the first Model L projects and reflecting further on the use of single-member LLCs in this area, we noted additional advantages as well as potential pitfalls to Model L, which we have explored in our forthcoming article in the 2014, Issue 4 edition of the State Bar of California’s Business Law News.

Is there a preferred jurisdiction where the Model L project LLC should be formed?

Each fiscal sponsor will need to consult with its legal advisors on this issue. In considering a jurisdiction, a sponsor and the project leaders should ask:

  • How flexible and developed is a state’s business law?  Delaware in particular is renowned for its advantages.
     
  • How high is the threshold under a state’s law for piercing the veil of limited liability and holding sole members liable for the LLC’s obligations?  Under the laws of some states, most notably Delaware and Nevada, the bar is set very high, while other states may take a much freer approach.
     
  • With single-member LLCs, does a state give creditors of the sole member remedies other than a “charging order” to facilitate access by the creditor to the LLC’s assets?  In states where a charging order is the only remedy, the LLC itself may in theory be better protected from creditors of the fiscal sponsor. We explore this issue in the upcoming Business Law News article mentioned above. 

Additionally, this decision may, but doesn’t need to be, influenced by where the LLC and the fiscal sponsor are actually located. A fiscal sponsor based in Connecticut with a Model L project operating in Massachusetts may very well find it legally more advantageous to form the LLC in Delaware than in either Connecticut or Massachusetts.

Can Model L be used internationally?

In principle, a Model L project LLC wholly owned by a U.S. Section 501(c)(3) fiscal sponsor should be able to conduct activity internationally, although whether this holds true in any specific situation will depend heavily on the laws of the countries where the LLC would operate, among other factors. Relevant questions to ask include:

  • How a given country would treat the LLC for purposes of local tax and limited liability
     
  • Whether there are any restrictions on the ability of an entity like a U.S. LLC, which is ordinarily used for business purposes, to conduct non-commercial charitable activities
     
  • Whether the country requires entities conducting business locally to have domestic shareholders, which would defeat the Model L structure from a U.S. tax perspective

Can the fiscal sponsor “sell off” the LLC in a Model L sponsorship at some point in the future?

Generally, yes, although there’s an important caveat. The usual rule with a charity’s assets, including an LLC membership interest, is that the charity must receive full value for any non-charitable disposition of those assets.

In the Model L context, however, it’s also important to note that the LLC is being used to pursue a specific charitable project. Under the laws of a state such as California, contributions given to the LLC in a Model L sponsorship would typically be impressed with a very specific charitable trust that reflects the purpose of the sponsored project. As a result, there may be limitations on the sponsor’s ability to sell the LLC to a private buyer for general business use if, for example, the assets in the LLC (vehicles, investments, cash) were contributed to support a recreational project for disabled children.  

More commonly, a Model L project would leave its existing sponsor to be operated either by a new fiscal sponsor or by an entirely new nonprofit 501(c)(3) charitable corporation, in which case the existing sponsor would simply grant out the LLC interest to the recipient charity without charge. The ease with which a Model L project can be transferred or spun off in this way is in fact an important advantage to Model L that Greg and I explore further in our published articles.

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The Model L concept is still in the initial stages of being explored and put to the test by the fiscal sponsorship field. Ultimately, however, we believe it will prove to be a valuable tool for sponsors to be able to confer the benefit of their 501(c)(3) tax exemption upon their projects, particularly in situations involving a substantial amount of money and a significant degree of risk.

-- Steven Chiodini
Of-Counsel, Adler & Colvin 

STEVEN R. CHIODINI is an attorney at Adler & Colvin, a San-Francisco based law firm that provides legal services and support to the nonprofit and philanthropic sector in the U.S. Before joining Adler & Colvin, Mr. Chiodini practiced as a corporate associate at Proskauer Rose LLP in New York. During law school, Mr. Chiodini worked in the Civil Rights Division at the U.S. Department of Justice in Washington, D.C. Read more. 

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Watch the recorded webinar to learn more about Model L fiscal sponsorship. 

See this page for a list of key topics covered and information on the presenters.

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