4

I was looking into the corporate structure of the Signal App, and it's very strange from the non-lawyer (IANAL) perspective.

The parent organization is a 501(c)(3) nonprofit, but the app is developed inside of an LLC.

There's also some messiness with the parent organization previously having been an LLC, while giving the public impression of being a non-profit.

Reminds me of OpenAI converting from a non-profit to a for profit company.

I would like to learn the purpose of the LLC as a subsidiary of a 501(c)(3) nonprofit.

1
  • 1
    Many LLC statutes make it a permissible form of organization for a non-profit and I've seen other non-profits organized in this manner (although I wouldn't recommend it). Most non-profits are organized as corporations, but that isn't required.
    – ohwilleke
    Nov 4, 2023 at 22:53

1 Answer 1

2
+100

Background

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.

(Wikipedia source)

Analysis

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:

  1. 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.

  2. 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.

Side question

Reminds me of OpenAI converting from a non-profit to a for profit company.

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.

8
  • 1
    What’s likely to be the purpose of the $105mm being given as a “loan” rather than as a gift? Nov 6, 2023 at 23:23
  • 1
    @Seekinganswers He wants to give the return on $105M of liquidity but doesn't just want to give that money outright. It could also have asset protection benefits by tying up his liquid assets where they can't be recovered in a lawsuit. He gets no charitable deduction for it except for a below market interest rate loan which is a gift of the 26 USC § 7520 interest on the long term loan each year.
    – ohwilleke
    Nov 6, 2023 at 23:39
  • Does the fact pattern suggest to you then that he does indeed intend to collect on / pursue repayment of the loaned principal then? Nov 7, 2023 at 15:52
  • 1
    @Seekinganswers Yes. That's right.
    – ohwilleke
    Nov 7, 2023 at 21:15
  • 1
    @BetsyDupuis Could be. Hard to know with him having a fairly private life (not even his real name is widely known). Could be nieces and nephews. Could be some other motive that I could only guess at.
    – ohwilleke
    Nov 13, 2023 at 10:43

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .