The OpenAI Drama Sidelined the Charitybehind Those Entities

Last month, the drama around OpenAI and its CEO Sam Altman's controversial ouster and reinstatement dominated headlines. While the story was fast-moving and hard to keep up with, one crucial aspect was lost in the media coverage-the fact that OpenAI is a nonprofit, tax-exemptcharitable corporation with a structure specifically designed to advance charitable purposes. The focus should have been on the nonprofit and its tax-exempt purposes, not Altman himself.

To understand the full picture, let's dive deeper into the OpenAI structure and the purpose of its nonprofit status.

Nonprofit-OpenAI, the Tax-Exempt Charity: To start, OpenAI was founded as a tax-exempt, nonprofit company organized in Delaware. This means that it operates under the laws of Delaware and adheres to its certificate of incorporation, which outlines the company's charitable purposes. These purposes include providing for the research, development, and distribution of technology related to artificial intelligence (AI), with the aim of ultimately benefiting the public. As a tax-exempt nonprofit, OpenAI is exempt from paying taxes and is required to advance its charitable purposes.

Creating Additional Entities to Advance Charitable Purposes: Delaware Limited Partnership (For-Profit LP) To achieve its charitable purposes, the board of Nonprofit-OpenAI determined that it would need more funding than it could obtain from charitable gifts and grants. As a result, they created a structure that allowed for private investments while still protecting the charitable purposes.

The key entity in this structure is For-Profit LP, a for-profit limited partnership with a valuation of $80 billion to $90 billion. Investments in For-Profit LP are structured in a way that caps the maximum financial returns for investors and commits them to the advancement of For-Profit LP's charitable purposes. In other words, investors agree to tie their financial gains to the achievement of these purposes.

This partnership agreement is crucial because it binds For-Profit LP's operations to the charitable purposes of the nonprofit, despite being a for-profit entity.

Subsidiaries of For-Profit LP To further protect charitable purposes, OpenAI created a subsidiary of For-Profit LP, For-Profit LLC, which is reportedly majority-owned by For-Profit LP and minority-owned by Microsoft. The operating agreement of For-Profit LLC warns that an investment in the company should be viewed in the spirit of a donation, highlighting the unconventional financial dynamics at play.

Control and Fiduciary Duties: Despite the complexity of these different entities, the structure ultimately allows the nonprofit corporation, and its charitable purposes, to remain in control. Through its ownership and control of Disregarded LLC, the general partner of For-Profit LP, and the manager of For-Profit LLC, the board of Nonprofit-OpenAI exercises control over the entire operation.

This control comes with fiduciary duties, which are legal obligations that directors and officers have to put the interests of the company and its stakeholders first. In this case, the stakeholders include those with an interest in the nonprofit and its tax-exempt purposes.

Recent Drama Involving Altman's Ouster and Reinstatement: As alleged in the public controversy around Altman's ouster and reinstatement, the board seemed to be concerned with their increasing inability to properly supervise the CEO and determine whether he was advancing the nonprofit purposes. The board members who ousted Altman seemingly acted responsibly by assessing whether Altman was managing the company to advance its legal purposes, fulfilling their fiduciary duties. This incident highlights the importance of fiduciary duties and the responsibility of the board to prioritize the nonprofit's charitable purposes.

Why the Charity Was Sidelined: It's easy to see how the sheer size of the dollar figures involved in the OpenAI drama could have distracted from the real star of the show-the nonprofit and its tax-exempt purposes. Additionally, the incentives for employees and investors to prioritize profit-making potential could have overshadowed the nonprofit's charitable interests.

Charitable Purposes Under Pressure: Regardless of whether the board chooses to dissolve the nonprofit or alter its charitable purposes to ease the for-profit ends, they must do so in accordance with the procedures specified in the corporate bylaws and applicable state law. These procedures typically require notice to regulators and oversight to protect any charitable interests. However, it's worth noting that the depleted budgets of state and federal regulators could make it challenging for them to weigh in effectively and ensure that the nonprofit and its charitable purposes are protected.

The Next Chapter for OpenAI: As the drama around OpenAI continues to unfold, it's imperative to keep the focus on the nonprofit and its tax-exempt purposes, as well as the responsibility of the board to fulfill its fiduciary duties and advance those purposes. The public should be alert to ensure that the company adheres to the requirements of its state nonprofit and federal tax-exempt status. If OpenAI fails to do so, the risk is that the for-profit entities would subordinate the nonprofit purpose to their profit-making interests, jeopardizing the charitable interests that should have been the spotlight all along.

This post comes to us from Ellen P. Aprill, the John E. Anderson Professor Emerita in Tax Law at LMU Loyola Law School, Rose Chan Loui, the founding executive director of the Lowell Milken Center for Philanthropy and Nonprofits at UCLA School of Law, and Jill R. Horwitz, the David Sanders Professor of Law and Medicine and the founding faculty director of the Lowell Milken Center for Philanthropy and Nonprofits at UCLA School of Law. It is based on their recent article, "Board Control of a Charity's Subsidiaries: The Saga of OpenAI," published in 182 Federal Tax Notes 289 (2024) and available here.

Read more

Bidenomics is Working!! <img src="" width="32" height="32" align="absmiddle"> [&quot;We are proud of Bidenomics!&quot; - Kamala Harris]

Youtube Shorts: 😳 ["We are proud of Bidenomics!" - Kamala Harris] Posted on July 6, 2024 11:38:46 AM PDT by Republican Wildcat Topic: Business/Economy | Chit/Chat | Miscellaneous Keywords: bideneffect, bidenomics, economcy, economy, kamala, kamalaharris Navigation: use the links below to view more comments. First 1-20, 21