Charitable Capital in Acquisitions

Many givers hold large balances in donor-advised funds (DAFs). That money has already been given away. The giver took the deduction when it went in, and it can only come out as grants to charities. Most of it sits in stock and bond portfolios while it waits. We want some of it to own part of the companies we acquire and to come back to the giver’s DAF larger than it went out.

The way in is a small company we call the charitable sleeve. It sits between the DAF custodians and the acquisition and carries all of the charitable rules, so the acquisition company does not have to. It pays corporate tax on its share of the profits. What reaches the DAF after that is never taxed again, which puts the DAF in the same tax position as an endowment that owns stock.

Habakkuk looked toward a day when “the earth will be filled with the knowledge of the glory of the LORD as the waters cover the sea” (Habakkuk 2:14). We believe a well-run company is one of the places that happens: in how it treats the people who work in it, the customers it serves, the vendors it pays and the town it sits in. Our five values describe what that looks like in practice, and the companies we buy are run on them.

Charitable money suits that kind of ownership. A DAF has no personal tax bill, no retirement date and no reason to sell on a clock, so it can stay in a company as long as the company is run well, which is how we want to own. What the company earns for the DAF goes back into the giver’s account and compounds there, as an endowment does, until it is granted out again.

From the top down there are four layers.

1. The givers’ DAF accounts, held at one or more custodians. A custodian is the public charity that sponsors the DAF, such as the National Christian Foundation, Impact Foundation, The Signatry or WaterStone. It owns the account’s assets outright. The giver recommends; the custodian decides, signs and holds.
2. The charitable sleeve, one per acquisition. It is an LLC owned only by custodians, acting for their givers’ accounts, and it elects on IRS Form 8832 to be taxed as a C corporation. It buys preferred units in the acquisition company, the one class every investor holds, on the same terms and at the same price.
3. The acquisition company, an LLC taxed as a partnership, owned by individual investors directly, by the sleeve and by Voyage.
4. The operating company, with the acquisition debt at the company level.

The election is what does the work. A plain LLC owned by a charity is ignored for tax purposes, so the charity would be treated as owning the operating business itself. Elect corporate treatment and the same LLC becomes what tax lawyers call a “blocker.”

Voyage forms each sleeve from a standard template and takes no fee at the sleeve. Any number of custodians can hold shares in one sleeve, so the acquisition company’s cap table shows one charitable line. A custodian that would rather form and own its own sleeve can, and the acquisition company’s documents do not change.

Take a giver with $100 million in a DAF who wants $2 million in one of our acquisitions.

Most commercial DAF sponsors will not accept a recommendation to invest in a single private company. Several Christian custodians will, each with its own approval process. A giver at a sponsor that will not can recommend a grant to a DAF at one that will. DAF-to-DAF grants are routine and carry no tax.

The giver then sends the custodian’s investment recommendation form (some call it a letter) naming the sleeve, the acquisition and the amount. The custodian’s investment committee looks at the company, the terms, Voyage, the charitable fit and the rules the sleeve keeps. Published timelines run from about a week to a few weeks once the full package is in. Custodians charge an origination fee and an annual fee on invested assets, paid from the giver’s account.

If the committee approves, the custodian buys shares in the sleeve with cash from the giver’s account, and the sleeve buys its units at closing. While the company is owned, the acquisition company allocates profits to the sleeve and makes tax distributions to it. The sleeve pays its tax and sends the rest to the custodians as dividends. When the company is sold or the sleeve’s units are redeemed, the sleeve pays tax on its gain and sends the rest up the same way. The custodian credits the giver’s account each time, and the giver recommends grants from it like any other DAF money. There is no new deduction along the way.

A public charity, which includes every DAF custodian and most community and university foundations, owes no income tax on dividends, interest or capital gains from its investments, with three exceptions.

The first is operating income through a pass-through: a charity that owns an LLC interest, a partnership interest or S corporation stock pays tax on its share of the business’s income, called unrelated business taxable income (IRC 512(c) and 512(e)).

The second is borrowed money: income and gains from property bought with debt are partly taxable to the charity, even when they would otherwise be exempt (IRC 514). Acquisitions are almost always financed partly with debt, and an LLC’s debt counts as debt of its owners.

The third is excise tax. Private foundations pay 1.39 percent on net investment income (IRC 4940). Private universities with large endowments per student pay 1.4, 4 or 8 percent from 2026 (IRC 4968, as amended in 2025). Neither applies to a DAF custodian, so a DAF is a better tax home than a private foundation or a large university endowment.

The sleeve answers the first two. The operating company and the acquisition company pay no tax themselves; profits are allocated to the owners as in any partnership, and individual investors pay their own income tax exactly as they would without the sleeve. The sleeve pays federal corporate tax at 21 percent on its share of profits and on its gain at a sale, plus state tax where the company operates. The acquisition debt reaches the sleeve as a partner and stops there, because a corporation’s debts are not its shareholders’ debts. The custodian owes nothing on what the sleeve sends up: dividends and gains on stock are excluded from unrelated business income (IRC 512(b)(1) and (b)(5)), and the sleeve’s shares are not bought with borrowed money.

In dollars, for every $100 the company earns on the sleeve’s units, about $21 goes to federal tax and about $79 reaches the DAF. An individual in the same units pays tax at their own rate on the same $100, and again on whatever the after-tax money earns later.

The same position as an endowment

A university endowment or foundation that owns ordinary stock pays no tax on its dividends or gains. The company behind the stock has already paid corporate tax on its profits, though, before any of it reaches the endowment. The endowment bears one layer of corporate tax inside the share price and nothing at its own level. A DAF in the sleeve bears one layer of corporate tax at the sleeve and nothing at its own level. The two are essentially identical, and a DAF in the sleeve is in no worse a tax position than an endowment that owns stock. Owning the units directly would not help: the charity would owe the same 21 percent itself as unrelated business income (more for a custodian organized as a trust), the borrowed-money rules would apply, the custodian would file a separate tax return, and several custodians will not accept it.

Where it can be better than an endowment

Two features can put part of the DAF’s money outside the corporate tax altogether. Neither is the plan for a given deal. We describe them so the picture is complete.

The first is the sale. When the company is sold, the buyer can purchase the sleeve’s shares from the custodians instead of the sleeve’s units from the sleeve. The sleeve then sells nothing and owes no tax on the gain, and the custodians’ gain on their shares is untaxed. The growth in the company’s value, which is most of what an acquisition earns, can then reach the DAF with no corporate tax at all. Buyers often accept this and adjust the price for the tax benefit they give up, so whether it happens depends on how the sale is structured. The same feature gives a single DAF a way out before a sale: a custodian can sell its sleeve shares to another investor, within the transfer terms of the operating agreement, without the company or the sleeve selling anything, and its gain is untaxed. Our documents leave both open.

The second is a loan. Part of the charitable money can go in as a subordinated loan instead of shares, either to the acquisition company or to the sleeve. Interest a charity receives is not taxed as long as the charity does not control the borrower, and the borrower deducts the interest, so on that part neither side pays tax. A loan earns its interest rate and no share of the growth, does not count as equity for an SBA loan, and has limits: the borrower’s interest deduction is capped at 30 percent of its earnings (IRC 163(j)), and a loan to the sleeve works only while no single custodian owns more than half of the sleeve (IRC 512(b)(13)). Counsel sizes it deal by deal.

The whole acquisition can also be a C corporation, so every investor holds stock and no sleeve is needed. Every investor then gives up the advantages of an LLC, including the tax basis step-up on an asset purchase. Where individual investors could qualify for the small business stock exclusion, that can be the better answer, and we decide it deal by deal. Our default is the LLC with a sleeve.

In the ordinary case, then, the DAF is taxed as an endowment owning stock would be, and the sale and the loan can do better. Either way, this is a tax-efficient way for charitable money to own part of an operating company that does good and is built to send more back to the DAF than went in.

These apply to every DAF. The custodian enforces them, and the template builds them in.

1. The 20 percent ceiling (IRC 4943(e)). For this rule each DAF account is treated as a private foundation. The account, together with the giver, the giver’s family and businesses they control at 35 percent or more, may hold no more than 20 percent of a company’s profits interest, looking through the sleeve and the acquisition company. Purchases over the limit have no grace period, and the penalty starts at 10 percent of the excess. Our working cap is 15 percent per account, with the family’s personal holdings counted in. A $2 million account in a typical acquisition sits well inside it.
2. No benefit to the giver (IRC 4958, IRC 4967). No payment out of the DAF’s investment may go to a giver, an advisor on the account, their family or any business they control. A giver whose DAF is invested takes no fee, paid board seat or job at that company, and does not become its chief executive. Our own DAFs, and those of our relatives, do not invest in companies we sponsor.
3. The custodian decides. Every document runs to the custodian, and it can say no at any point before it signs.
4. Below the guaranty line. Lenders, including SBA 7(a) lenders, ask every owner of 20 percent or more of the borrower for a personal guaranty, and a charity will not give one. The 15 percent working cap keeps the sleeve under that line.
5. Securities rules. The custodian, not the giver, is the purchaser. Custodians large enough to do this are accredited investors in their own right.

The acquisition company’s operating agreement carries a standard charitable holder clause. It names the sleeve as a permitted preferred holder, sizes tax distributions to cover the sleeve’s corporate tax, excuses the sleeve from any guaranty or obligation beyond its purchase price, lets the sleeve’s shares be sold in place of its units at an exit and move among custodians, and commits the company to give custodians what they need for the 20 percent test and their own reporting. The other investors sign the same agreement they would have signed anyway.

A sleeve needs each custodian’s investment committee to approve each acquisition. That is the right way to start, but a custodian can decline late, after a purchase agreement is already moving, and an owner who chose us because we close is the one who pays for it.

Once the first acquisition has closed and two or three custodians have approved Voyage and the sleeve template, the next step is a standing charitable vehicle above the sleeves. It is an LLC taxed as a partnership that admits DAF custodians, acting for their givers’ accounts, and no one else. A written mandate defines which companies qualify, drawn from our five values and the operating covenants every company we buy is run on. Each custodian looks at Voyage and the mandate once and agrees in advance to the amount it will provide.

The money stays in the givers’ DAF accounts, invested and untaxed, until an acquisition that meets the mandate needs it. Cash held in a sleeve would earn taxable corporate income, and cash in a DAF does not. For each qualifying acquisition, the vehicle forms that deal’s sleeve and the custodians fund it on notice, with no new committee vote. A custodian may stand aside only where its own published policy excludes a company, and the mandate is written so that does not arise. The vehicle borrows nothing against the custodians’ agreements, because borrowing would make its income taxable to every charity in it.

Every deal keeps its own sleeve, so each company can be held, recapitalized or sold on its own, and the sleeve’s shares can still be sold at an exit. The 20 percent limit is now tested for each DAF account through both layers, and every other rule holds as before. The custodians still own the money, and Voyage manages it under the mandate they approved. The difference is that charitable money is ready when an owner is.

Each piece is in use today. What we add is a sleeve template that drops into any acquisition, and a path from one deal to a standing vehicle with a mandate about how the companies are run.

University endowments, foundations and pension plans have owned stakes in private companies through blocker corporations for decades, inside private equity funds they agree to supply in advance. The sleeve applies that ordinary practice to DAF money.

The National Christian Foundation opened its Alternative Investments Pool in 2023 so givers can place part of a Giving Fund in private investments. At August 2026 it had $71.5 million promised to nineteen private funds and six direct deals, chosen with Sovereign’s Capital, a faith-driven manager.

Impact Foundation’s accounts invest in private companies, loans and private equity funds on the giver’s recommendation, more than $900 million placed in more than 880 companies. Its holdings include Mosaic Genesis, which backs searchers buying smaller established companies, and it handles the tax filings that come with operating companies.

In August 2026 WaterStone bought all of Salem Media, about $31.7 million, with money a donor had given into a DAF: a custodian owning a whole operating company.

ADG Kingdom Impact Fund (Houston, launched 2019) buys control of established companies as permanent capital and accepts NCF charitable capital. STAPLE Investments (Michigan, founded 2023) is a permanent holding company buying Christian-owned businesses. Both hold companies for the long term with charitable money beside conventional money.

Fidelity Charitable, the largest commercial custodian, lets its largest accounts recommend private funds on conditions that include an SEC-registered manager, a fund of at least $50 million and little or no unrelated business income. It screens out exactly the tax exposure the sleeve removes.

• Counsel’s sign-off on the sleeve template, the charitable holder clause and the state tax position in the company’s states.
• Counsel’s view, deal by deal, on selling sleeve shares at exit or to another investor, and on sizing a subordinated loan from the DAFs to the acquisition company or the sleeve.
• Each custodian’s written confirmation that it will accept shares in a Voyage-formed sleeve, or its own sleeve if it prefers.
• For the standing vehicle: the wording custodians will accept for the mandate and for standing aside, how their advance agreements bind when a giver’s account is granted down, and the securities filings that come with managing it.
• The IRS’s proposed DAF regulations (2023) are still not final. They treat investments and reasonable fees as generally outside the distribution rules. We will update this paper when they are final.

• Internal Revenue Code sections 163(j), 512, 514, 4940, 4943, 4958, 4966, 4967, 4968
• Treasury Regulation 301.7701-3 (entity classification elections)
• Proposed regulations on donor-advised funds, 88 Fed. Reg. 77922 (November 14, 2023)
• IRS Publication 598, Tax on Unrelated Business Income of Exempt Organizations
• NCF investment guidelines (ncfgiving.com/investments) and the Alternative Investments Pool fact sheet (data as of August 31, 2026)
• Impact Foundation (impactfoundation.org/about and /portfolio)
• Fidelity Charitable, DonorFlex program guidelines (June 2026)
• WaterStone and Salem Media, Religion Unplugged (June 13, 2026)
• ADG Kingdom Impact Fund (faithdriveninvestor.org/adg1)
• STAPLE Investments (stapleinvestments.com)
• Morgan Lewis, “Accommodating Tax-Exempt Investors,” private equity fund formation deskbook
• Scripture quotation from the ESV Bible (The Holy Bible, English Standard Version), copyright 2001 by Crossway, a publishing ministry of Good News Publishers. Used by permission. All rights reserved.

For informational purposes only. Not an offer to sell or a solicitation to buy any security, and not tax or legal advice.