Article on The Use of Disregarded LLCs by Charities

Alyson Outenreath (Professor at Texas Tech School of Law) recently published an article entitled “Uncharitable” Policy for Charities: Use of Disregarded LLCs by I.R.C. Section 501(c)(3) Organizations Is a Trap for the Unwary in Certain States, 54 S. Tex. L. Rev. 685 (2013). Below is the introduction to this article:

Anyone who has reviewed the organizational chart of a business enterprise is familiar with seeing multiple entities, and in today’s world it might seem as if a business’ aggregate operations comprise an infinite number of entities. Reasons can vary for why a business would benefit from separating its various assets and operations into separate entities, but one of the most customary reasons is asset protection. ¹ For example, if A, an oil and gas production company, forms a corporation to own and operate various production sites across the United States, the assets and revenues of each and every one of A’s production sites would be fair game in a lawsuit relating to any single production site because all production sites are held and operated by a single entity. ² In contrast, absent any veil-piercing or alter ego issues, if A had formed separate corporations to own and operate each production site, the only assets and revenues at risk in a lawsuit relating to one single production site would be the assets of the separate corporation that holds such production site. ³ As a general rule, a multiple- entity structure segregating each production site into a separate corporation would protect the assets and revenues unrelated to the lawsuit. ⁴

Charities are no different. Just as A wants to protect the assets and revenues of A’s nationwide oil and gas production business, charities want to protect their assets and themselves. ⁵ For example, a multiple-entity structure …

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.