On February 21, 2018, Moxie Marlinspike and WhatsApp co-founder Brian
Acton announced the formation of the Signal Foundation, a 501(c)(3)
nonprofit organization. The foundation was started with an initial $50
million loan from Acton, who had left WhatsApp's parent company,
Facebook, in September 2017. The Freedom of the Press Foundation had
previously served as the Signal project's fiscal sponsor and continued
to accept donations on behalf of the project while the foundation's
non-profit status was pending. By the end of 2018, the loan had
increased to $105,000,400, which is due to be repaid on February 28,
2068. The loan is unsecured and at 0% interest. . . .
Signal Messenger LLC was founded simultaneously with the Signal
Technology Foundation and operates as its subsidiary. It is
responsible for the development of the Signal messaging app and the
Signal Protocol. Moxie Marlinspike served as Signal Messenger's first
CEO until stepping down on January 10, 2022. Brian Acton
volunteered to serve as interim CEO while the organization searched
for a new CEO. In June 2023, Signal announced that Acton would be
staying on as CEO following the search.
Why would a 501(c)(3) nonprofit organization run its major operations
in an LLC?
It is a logical choice, although not the only possible one. The answer has two parts, first, why have a subsidiary at all, and second, why organize that subsidiary in limited liability company (LLC) form.
The question of why one might want to structure a messaging app company as a non-profit, and how it qualifies as a non-profit, is beyond the scope of this question, has a less clear answer, and needs to be a separate question so that this question remains focused.
Why have a subsidiary for a non-profit?
There are probably two primary reasons to have a subsidiary of this non-profit:
It insulates the $105 million+ of Signal Foundation assets from the liabilities associated with the active conduct of an operating business like Signal Messenger, just like a subsidiary of a "for profit" business does. The liability risk of the combined entity, from intellectual property infringement claims, consumer class actions, employment related liability, tort liability, and breach of contract claims from vendors and others is almost entirely concentrated in the Signal Messenger operations which don't require all that much cash at any one time. By limiting liability to the subsidiary LLCs assets, the much greater amount of property in the Signal Foundation is protected from those liabilities.
There is a significant risk that Signal Messenger operations could be classified at some future juncture as an "unrelated business" to the Signal Foundation upon which the unrelated business income tax a.k.a. UBIT (basically the same amount of tax that could be paid on the profits of the business if it were a C corporation) might be owed. By having a clearly separate set of books, the subsidiary form makes it easy to clearly define the amount of UBIT owed without involving the assets of the Signal Foundation in the analysis. Going forward, if Signal Messenger is found to be an unrelated business by the IRS, it could simply elect to be taxed as a C-corporation going forward on a one page simple tax form, with no disruption to its operations and without putting the non-profit status of the Signal Foundation at risk.
Why choose the LLC form for a non-profit subsidiary?
Assuming that these are the reasons for the Signal Foundation to have a subsidiary, then the question posed is, "why use an LLC form for a subsidiary of a non-profit?"
The subsidiary needs to be some kind of limited liability entity with separate accounting books to meet its purposes. But, it could be a for profit corporation or a non-profit corporation, instead of a limited liability company. Limited liability protections are muddier for other options like trusts and unincorporated non-profit associations, and aren't clarified by the mountains of case law spelling out how limited liability protection works for an LLC or corporation.
A for-profit corporation would be taxed as a C-corporation destroying the goal of tax free operations in which UBIT tax liability is only a possibility, and not a certainty. S-corporation status is generally not available for a company with a non-profit sole shareholder.
Between a non-profit corporation and a limited liability company, the limited liability company that is a 100% subsidiary of a non-profit has a simple basis of taxation (it is disregarded for income tax purposes with its assets and operations treated as though they are a division of the parent) and it can have (and by default, does have) a simple management structure (its managers and officers are appointed by and serve at the will of its sole member, the non-profit's representative). The LLC form is also familiar to other participants in the app development marketplace with whom the subsidiary might do business.
In contrast, a non-profit corporation subsidiary would have to separately qualify for non-profit status with a separate non-profit application for corporations affiliated with another primary non-profit.
Also, most state non-profit corporation statutes provide for, or at least assume as a default, a more complicated management structure designed to facilitate self-perpetuating governance by an entity that has no actual owners. These complications are unnecessary in a 100% owned subsidiary, where the non-profit government structure issues are addressed at the parent entity level.
More analysis is provided in my answer to a similar previous question.
An LLC can be a primary non-profit too.
As an aside, while limited liability companies are predominantly used as for profit entities, many state statutes permit non-profits to be organized as limited liability companies. Mostly, this form is chosen for non-profits with transferrable owners like homeowner's associations, country clubs, and trading platforms with participant owners. But, non-profit limited liability companies aren't limited to those examples.
An LLC as a primary non-profit, however, makes much less sense than an LLC as a subsidiary for a primary non-profit, because the management structure concerns present in non-profit corporations are also present in non-profit primary LLCs.
Reminds me of OpenAI converting from a non-profit to a for profit
This is a quite different kind of transaction. I previously worked as a professor for a former non-profit, the College for Financial Planning, that made this conversion.
What is done, essentially, is that the non-profits assets and liabilities associated with an active operational enterprise are sold to a for profit corporation (in this case, first, in 1997, to Apollo, Inc. the parent company of the for profit University of Phoenix, and then, in 2018, from Apollo, Inc. to Kaplan, another for profit educational company), with the proceeds of the sale (which must be at arms-length fair market value) transferred to the pre-existing non-profit entity (in this case, the National Endowment for Financial Education), which typically becomes a grant giving oriented foundation with few active operations.