How to Donate Shares of Privately Held Companies

Strategic giving is all about maximizing your charitable impact while maximizing your available tax advantages — but many strategies are often left unexplored, even for high-net-worth individuals and business owners with extensive resources invested. 

If you’re wondering how to donate shares of privately held companies, you’re in the right place. Greater Houston Community Foundation (Foundation) helps donors integrate donations of non-cash assets seamlessly into their financial, estate, and tax plans, working with legal teams and existing professional advisors to get you through the process smoothly and efficiently. 

The following article outlines the issues, process, and considerations for donating shares of privately held companies.  Please call the Foundation at 713-333-2210 today to discuss your giving. 

Key Insights

• Donating shares of privately held companies can create significant tax benefits for donors on multiple fronts, such as current income tax deduction, possible avoidance of long-term capital gains taxes, and removal of assets from your estate to avoid future estate tax implications.
• Proper valuation through a qualified independent appraiser is essential for tax compliance and maximizing deduction benefits.
• Strategically donating private company shares can support philanthropic goals and business planning objectives, like ownership transitions or liquidity needs.
• By working with your existing advisors and business partners, the Foundation can streamline the complex process and allow you to see greater impact.

Table of Contents

• Understanding donating privately held stock
• Can you gift shares of a private company?
• The benefits of making charitable gifts of privately held stock
• How much of a stock donation is tax-deductible?
• Challenges and considerations for gifting private company stock
• Steps involved in donating appreciated stock to a foundation
• Looking to donate your non-cash assets? The Foundation makes it easy.

Understanding donating privately held stock

Privately held companies, unlike their publicly traded counterparts, do not offer shares on public stock exchanges. These businesses are typically owned by a smaller group of stakeholders, which may include founders, family members, employees, or select investors. Private company shares represent ownership stakes in these businesses and come in several forms:

• Shares in C-corporations
• Shares in S-corporations
• Limited Partnership (LP) interests
• Limited Liability Company (LLC) membership interests
• Other privately held business ownership positions

The biggest difference between public and private shares is their marketability and value transparency; while public shares have accessible market prices and can be bought and sold quickly and easily, private shares lack the visibility that would give them this liquidity. 

Can you gift shares of a private company?

You can donate private equity to foundations and charities, and doing so can be a powerful charitable giving and financial planning tool, but it can be more complex than gifting appreciated stock that is publicly traded. 

Most types of business interests — including shares in C-corporations and S-corporations, membership interests in LLCs, and partnership interests — can be donated, although restrictions may apply depending on the business structure and governing documents.

The key requirements typically include obtaining proper valuations, securing necessary approvals from stakeholders and board members, and ensuring the recipient organization is a qualified charitable organization equipped to accept and manage the assets.

The benefits of making charitable gifts of privately held stock

Aside from the numerous benefits of philanthropy for your community, the primary benefit of donating privately held shares for most donors is the tax advantages. Donating private shares and appreciated stock can often yield tax benefits that exceed those of simple cash donations. 

When you donate business interests held for more than one year, you may claim a charitable giving tax deduction for their fair market value at the time of donation rather than just your original investment cost. For high-net-worth individuals in top tax brackets, this deduction can result in significant income tax savings.

You can also potentially avoid triggering capital gains taxes by donating shares instead of selling them, often avoiding tax liability and claiming a deduction for the full market value of your donation. Removing the assets from your estate may also avoid future estate tax issues.

Donating business interests can also have several advantages related to business liquidity. By donating your private shares, you may be able to:

• Help transition ownership without triggering immediate tax consequences
• Diversify ownership structure in a tax-efficient manner
• Coordinate sales with succession plans
• Provide liquidity solutions for businesses preparing for sale

How much of a stock donation is tax deductible?

For qualified charitable donations of appreciated private company stock held for more than one year, donors can generally deduct the full fair market value of the donated shares, up to 30% of their adjusted gross income (AGI) in the year of the gift. If the deduction exceeds the 30% threshold, the excess can usually be carried forward for up to five additional tax years. For stock held for one year or less, the deduction is limited to the donor’s cost basis, and different AGI limitations must be calculated.

It’s important to note that the full deductibility depends on proper valuation documented by a qualified appraisal for donations exceeding $5,000 in value. Different rules may also apply for different types of business entities that receive the donation. For example, donations to a private foundation, rather than a public charity like Greater Houston Community Foundation, often have lower AGI limitations and different valuation rules.

Challenges and considerations for gifting private company stock

Although there are numerous benefits involved with gifting your privately held stock to charitable organizations, there are also challenges and considerations to be made. The Foundation often helps donors solve for the following variables:

• Valuation disputes. Because private company shares don’t have publicly quoted prices, determining their fair market value requires a professional appraisal. This valuation process can be complex and may sometimes lead to disagreements with tax authorities.
• Ensuring compliance. Depending on the company structure and size, donations of private shares may need to comply with securities regulations. Also, existing shareholder agreements, buy-sell provisions, or company bylaws may restrict or govern how shares can be transferred, even for charitable purposes.

While these challenges are inherent to most donations of shares in privately held companies, some unique situations may present unique challenges.

• Estate planning integration adds a layer of complexity to the donation of any asset, but also opens up many synergies and unique opportunities. 
• Coordinating with a family business can warrant several additional considerations related to maintaining control and governance, balancing charitable goals with the needs of family members, facilitating next-generation involvement, and aligning donations with succession plans. 

Unrelated Business Income Tax (UBIT) and S-Corps: key considerations for donors

When engaging with businesses structured as S-Corporations (S-Corps), it is essential to understand the implications for charitable donations, particularly regarding Unrelated Business Income Tax (UBIT). S-Corps are unique entities that do not pay corporate income tax; instead, they pass through the income and expenses to their shareholders. This structure often leads to misconceptions about tax liabilities for nonprofit organizations that receive shares from such companies.

Many donors may assume that shares donated to the Foundation, particularly from S-Corps, are tax-free, allowing them to reap the full benefits of their charitable deduction without worrying about tax liabilities. However, it is crucial to clarify that while the gift to the Foundation may receive a charitable deduction, it is not exempt from paying income tax on its share of the income generated by those donated shares. This misconception can be problematic, as it can lead to frustration when it becomes apparent that the organization will incur a tax obligation on the income generated from the shares when held in the Foundation. 

S-Corps do not necessarily disburse taxable income and cash flow simultaneously. Suppose the S-Corp does not distribute any cash alongside the income. In that case, the Foundation may face a significant financial burden without having the necessary liquidity to cover taxes and associated costs. This situation exemplifies why illiquid gifts must be accompanied by sufficient cash resources to cover fees, taxes incurred, and tax preparation charges related to maintaining the fund.

Steps involved in donating appreciated stock to a foundation

Giving appreciated stock (whether public or private) is easier with Greater Houston Community Foundation. We offer a streamlined approach that allows us to handle the complexity and you to make a difference.

Timing of donations and tax deductions

When planning to donate shares of a company, timing is crucial. To ensure that potential tax deductions are valid, donors need to complete their donations before any sale is lined up. If a donor has already started discussions or negotiations regarding the sale — even if no formal contract has been signed — the IRS may disallow the deduction. Thus, it’s essential to prioritize the donation in the process to secure any intended tax benefits.

It’s important to note that whether a deduction is ultimately allowed is an issue exclusively between the donor and the IRS. The Foundation cannot guarantee that the donation will be deductible, and we do not take responsibility for the outcome of any tax implications. Please consult a trusted professional advisor regarding the consequences of any transaction.

After a donation is made, any subsequent sales are at the discretion of the Foundation. We have a fiduciary and tax obligation to ensure that any sales, especially to related parties, are conducted at fair market value. We may not be able to facilitate sales that a donor has in mind, and should appraisals be necessary, the costs may need to be covered by the donor’s fund. Being aware of these considerations can help donors navigate the process more smoothly and avoid potential pitfalls.

Looking to donate your non-cash assets? The Foundation makes it easy.

Donating shares of privately held companies presents significant opportunities for both charitable impact and financial benefits. However, this process demands meticulous planning and precise execution. Greater Houston Community Foundation stands as your dedicated partner, offering the expertise and infrastructure necessary to manage complex assets such as private company shares.

By working with the Foundation, you gain access to:

• Expertise in handling complex charitable gifts
• Ability to time donations strategically for maximum tax benefit
• Flexible giving options, including donor advised funds
• Professional management of donated assets
• Simplified record-keeping with consolidated tax reporting
• Deep knowledge of community needs and effective local nonprofit organizations

Whether you’re looking for a partner to donate privately held stock, wondering how to start a scholarship fund, or are just looking to make sure your charitable giving needs are met for year-end giving, Greater Houston Community Foundation can help. Ready to get started? Call the Foundation at 713-333-2210 or reach out directly to get started giving. 

More Helpful Articles by Greater Houston Community Foundation: 

• How to Donate Business Interests Strategically
• What Is the Great Wealth Transfer?
• How To Get Started with Legacy Giving
• How Does a Donor Advised Fund Work?
• Tax Strategies for Charitable Giving

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