Recently, Patagonia founder Yvon Chouinard made news when he announced that his family was donating the company to charity in an effort to fight climate change. It was certainly an unusual move and made a lot of headlines for both Chouinard and his company. But some have accused the businessman of having less than pure motives, as he and his family are set to receive numerous tax benefits from the arrangement they’ve created.
Let’s now take a look at exactly what it means to donate a company to charity, see how the business will operate moving forward, and examine the pros and cons of the Chouinard family’s decision.
Who Is Yvon Chouinard?
What type of man donates his entire company to charity? Critics will say he’s a dishonest opportunist using the guise of charitable work to cheat tax obligations. Fans will say he’s the best kind of philanthropist, one working to change the very nature of capitalism to better work for the common good. The truth is probably somewhere in between. To try and understand his motives, let’s take a closer look at the man and what he says he stands for.
Blacksmithing Business
Yvon Chouinard’s first foray into the business world started way back in 1957. Chouinard was very much an outdoors type; he enjoyed activities such as surfing and mountain climbing. It was the latter hobby that led to his first business. Yvon purchased a used coal-fired forge and set up a small blacksmithing workstation in his parent’s backyard. With his forge, Yvon crafted the metal spikes that climbers use to secure their ropes and began selling them.
The spikes became popular enough that Chouinard could support his adventures through the sale of the spikes. Eventually, the businessman realized he could take his blacksmithing tools with him on the road. This allowed him to travel all around the US and Canada on surfing and climbing trips while still earning a living.
The Reluctant Businessman
Yvon Chouinard has often said that he never wanted to be a businessman. In fact, he isn’t even a fan of the term. He once told a reporter that he’d rather be called a dirtbag. When prompted about the wealth his businesses allowed him to obtain, he replied that he’d given it all away and doesn’t even have a savings account. The reporter pushed further, saying that Chouinard’s success in the business world must mean he wanted to become a businessman at some point. But Yvon pushed back again, saying that all he really ever wanted to be was a craftsman.
What Is Patagonia?
While it was his craftsmanship with his coal forge that brought Chouinard his initial success, the company that became worth millions was Patagonia. The company started as Chouinard Equipment in 1970. Yvon was climbing in Scotland and purchased a rugby shirt to keep his metal equipment from cutting into his neck.
The shirt suited the purpose so well that friends back home in the US began asking where they could get their own. He founded Chouinard Equipment to import the shirts and, later, a whole range of clothing and equipment designed for climbers. Chouinard changed the name of his company after a trip to Patagonia to climb Mount Fitz Roy.
Company Culture
The company culture at Patagonia seems to have long-reflected the “reluctant businessman’s” worldview. In his memoir, he talked about how making Patagonia a great place to work was important to him. Employees can wear whatever they want and work whenever they want, as long as they complete their work on time. “You go surfing when there’s surf, you go powder skiing when there’s powder. We wanted to have a job where we would be allowed to do that. And we wanted to go work with friends – we didn’t want to work with MBAs,” he explained.
Environmental Activism
As a company built around outdoor adventures, Patagonia has long made an effort to be as kind to nature as possible. For years, they’ve donated 1% of their profits to grassroots environmental nonprofits. They’ve also continually made efforts to reduce their carbon footprint and rely more heavily on suppliers with minimal environmental impact. In recent years, they added the protection of the environment to their mission statement.
Giving the Company Away
Chouinard recently announced on the Patagonia website that Earth is now its only shareholder. He went on to explain that he and his family were donating all of their shares in the business to fight climate change. The business will continue to operate, but nearly all its profits will go toward helping the environment.
The Company’s New Structure
In setting up the new structure of the business, Chouinard created a two-tiered system. The company will now be split into two owners; each is a legal structure created for the purpose of the deal. The vast majority of the company, 98%, will go to an entity known as the Holdfast Collective. The other 2% goes to a trust called the Patagonia Purpose Trust. Under the arrangement, the Holdfast Collective has no voting rights in the new arrangement. Those belong exclusively to the trust.
Patagonia Purpose Trust
The Patagonia Purpose Trust is under the control of the Chouinard family. Although the trust will only own 2% of the business, it has all the say in how it operates. As we’ll see later, some critics have called this a clever way to cheat taxes. However, Yvon says that the arrangement is made purely so that he and his family can ensure the company doesn’t stray from his environmentalist goals.
This type of dual-tiered stock isn’t unusual. Google’s parent company Alphabet does the same thing. Their stock structure allows for many investors to contribute to the company but reserves most of the voting power for the company’s founders.
Holdfast Collective
The Holdfast Collective was created to be the entity that handles environmental work on behalf of Patagonia. It’s still unknown exactly what type of activities the collective will be engaging in, though its organizational structure may provide some clues. While most charitable foundations are 501(c)(3) organizations, the Holdfast Collective is a 501(c)(4). This means that, while the collective will forgo the tax breaks that a 501(c)(3) would get, they can donate to political candidates.
Tax Savings
After the initial news broke of the company profits being redirected to charity, critics were quick to point out how much taxes were being saved by the move. But is it deliberate tax avoidance or a mere side effect of charitable giving? Much of the criticism stems from the fact that the Chouinard family still controls the business and that billionaires can amass a fortune and get by without paying any taxes at all. Billionaires, including Bill Gates, Mark Zuckerberg, Warren Buffett, and Barre Seid, have used the same tactic.
Avoiding Tax on the Gift
The value of the stock going to the newly created 501(c)(4) is around $3 billion. Even though the collective doesn’t get the same tax breaks that a 501(c)(3) would, it still gets one major one: it’s exempt from the federal gift tax. The 2% donation to the trust is not exempt, and that alone comes up to over $17 million. The rate for gifts of the amount given to the collective would be 40%. This means that by setting up a nonprofit to hand most of the company’s assets over to, Chouinard has saved nearly $1.2 billion in taxes.
Avoiding Capital Gains Tax
Although the trust must pay the $17.5 million gift tax, the Chouinard family is saving tax money even on that deal. This is because they will not have to pay capital gains tax on the money they’re giving away. Under other arrangements, they’d have to pay taxes on the amount the stock has risen since they acquired it. Because the value of the company has increased a lot since its founding, that means significant tax savings for the family. Bloomberg estimates that the tax bill would have been close to $700 million.
Pros and Cons of the Move
Ultimately, giving away a company to a pet cause is both tax avoidance and philanthropy. The Chouinards gave up the significant income tax savings that a 501(c)(3) offering would have provided them to secure the right to donate to political campaigns. Will those donations bear more fruit than the tax savings would have? The family seems to think so.
But the income tax they’ll be paying still pales in comparison to the amount in taxes saved by the move. Selling the company outright and then giving the money to charity would have resulted in well over a billion dollars in capital gains and gift taxes. Whether this type of massive tax avoidance outweighs the good some businesspeople can do with it depends on your perspective.
