One of the great moments in a celebrity’s career is that pinnacle moment where they can do some “good”. It is actually a tremendous honor and most big celebrities do so with vigor, appreciation, passion and commitment (like they would in their professional careers) to advance the causes they feel so passionately about.
Choosing the right charitable structure to advance their cause is a very important consideration. There are five (5) potential charitable legal structure one can establish. They are private nonoperating foundation, private operating foundation, public charity, fiscal sponsorship and donor advised fund. Which type makes the most sense in a given scenario is highly dependent on both practical and legal considerations.
Practical considerations include:
- How easy and efficient is it to establish?
- How much does it cost to start as well as what are the costs on an ongoing basis?
- What control does the celebrity have?
- What responsibilities will the celebrity have practically?
Legal considerations include:
- Based upon the anticipated outputs and inputs, is this entity legally able to do these things?
- If the celebrity decides to terminate, how easy is it to dissolve?
- Could the celebrity end up breaking any rules and get into legal trouble unknowingly?
- Is there anonymity?
- Does the celebrity have to have a board of directors?
- Can it raise charitable dollars?
- Are there any self-dealing rules the celebrity needs to be aware of?
More often than not, while a celebrity may in fact donate much time and financial resources, they also have the “star power” to inspire and enlist their fanbase and their stakeholders around them to “give” to their cause. What this means is, they are in a great position to raise exponentially more funds than just their own.
Thus, establishing a private foundation to operate the celebrity’s charitable initiative would almost certainly severely impinge the celebrity’s ability to raise charitable funds as other private foundations (big sources of charitable funds), donor advised funds and corporations simply will not donate to private foundations.
In addition, to the extent a celebrity would be an “interested party” and transactions with them and the charitable entity may be heavily scrutinized. With a private foundation, there are serious economic penalties of 200% against the celebrity (and team) if self-dealing rules are triggered with a public charity, the rules are much more relaxed.
Thus, establishing a private foundation is almost always not in the best interests of the celebrity and the cause and one should steer clear unless the stars are perfectly aligned, no pun intended.
*Celebrities include athletes, public figures, entertainers and musicians.