Yesterday I was reminded of the usefulness of a great technique for small business owners to do well by doing good.  Many people know that you can donate publicly traded stock to many charities.  Most charities will accept this type of asset because the charity can find a ready market to sell the stock, take the cash and use the cash toward its good works.  The donor gets a charitable deduction worth the value of the stock.  This is far preferable to selling stock that has capital gains and then having only a fraction of the stock's worth left after taxes to donate to the charity. 

But you can also use non-publicly traded stock (or LLC interests) in a similar fashion.   As Fidelity notes in this webpage, one of the biggest challenges in this technique is finding a charity that can use this asset.  Without a ready market, the charity can't sell the asset.  At best, the charity may be able to enjoy whatever dividends get paid out, but that can open up the charity to a special tax called the UBIT, or Unrelated Business Income Tax,  These tax pitfalls, combined with the fact the charity has an asset on its books it can't sell, often means many won't accept non-publicly traded stock. 

From the business owner's perspective, giving a minority interest in his company to a charity isn't a good long-term solution either.  The charity must be given all the rights and interests of an owner, including access to the financials and a seat at the annual shareholders' meeting.  To get around this, you might be able to set up your own private foundation to accept the stock, but that carries its own headaches (and advantages) that I'll address in a later post. 

Where giving stock or LLC interest in your company makes sense is when you are contemplating a sale of the company or its assets.  Some larger charities will accept the asset if the corporation is about to be sold, as noted in this page from Northwestern Univerisity.   That's because the charity doesn't expect to hang onto the stock long and will be bought out by the same buyer who is going to buy the business owner's remaining stock.  This can be tricky though, because you can't be too far along in the sales process or the business owner can face problems with the IRS based on the theory that the owner assigned income that would otherwise be taxable to him.  As a result, the business owner pays tax on the income, including capital gain. 

But if the business owner is ready to sell without being obligated to sell to a particular buyer, donating a portion of the stock to a charity and then letting the charity ride the seller's coattails in the sales process can be a great deal.  The business owner avoids capital gains on the stock sold by the charity and gets a charitable deduction that offsets the capital gains on the rest of the stock.  The charity gets more cash to carry out its mission.  The IRS gets less taxes (legitimately).  The buyer usually doesn't care because it neither harms him nor helps him.

This same technique can also work with a Donor Advised Fund.  If you haven't identified a single charity that can take your stock or want to give to more than one charity or benefit charities over time, a donor advised fund can take the stock, sell it to the new buyer, and then allow you to direct where the funds assets are donated. 

This may be more than you wanted to know, but I found it fun to let my wonky side out in writing this post.