Benefits of Donating
How to Use the Secret Trick of Successful Entrepreneurs
Everyone has heard about Zuckerburg giving away his wealth. Sure, he cares about the world, but he’s using a special strategy to make money—huge amounts of money. In this article we take a sneak peak into how to make more money through business donation. We have worked with many founders and investors in Kansas City and across the nation who have reaped the benefits of giving—from entrepreneurs involved in accelerators such as Sprint’s Techstars demonstrating their philanthropic intent by pledging to give in the future through Pledge 1%, to Kansas City entrepreneurs who give now through local foundations such as the Greater Kansas City Community Foundation and the National Christian Foundation.
Let’s look at the most common business scenario:
The Big Exit
You are killing it! Buyers are in the wings and now it’s time to think about all that revenue and the taxes that may cut your payout in half. Savvy entrepreneurs are donating equity prior to the sale. Doing this means they can receive the maximum tax deduction allowed by law for the donation, avoid capital gains tax and may be able to receive a lifetime income stream. One local entrepreneur exited his company for over $175M. Congratulations!! And with that came—yes, you guessed it—the much dreaded taxes and capital gains situation. Fortunately, he chose to donate prior to that exit.
Here’s a scenario to drive home the point.
Let’s take a look at the impact of giving a 20% non-voting interest in a $5M C-corp (with a $100,000 cost basis) prior to the sale. If you give, then sell, capital gains tax is reduced to around $980,000 compared to $1,225,000 by selling then giving. Income taxes saved reach $446K rather than the $336,730 you would save by waiting. Because you decided to donate before the sale, your net taxes owed are around $534K. Not $888,270. And giving? Well, that is around $1M compared to $755K. Because you decided to give assets rather than cash and you decided to give before the sale, $245K more would go to your favorite charity. Remember, this is an illustration based on a set of assumptions. So check with your financial consultants to get a more accurate estimate.
If this sounds like you then let us help you get started on your donation today!
Not ready to exit?
In the Trenches
You are still busting your bottom toward building the company of your dreams. It is growing but not yet ready to exit.