Board Control of a Charity's Subsidiaries: The Saga of OpenAI

Abstract

In this article, the authors demonstrate how OpenAI’s corporate structure was designed to protect the primary of the nonprofit corporation’s charitable purpose and tax-exempt status. OpenAI started as a tax-exempt, nonprofit company organized in Delaware, OpenAI Inc. Its Delaware Certificate of Incorporation states that its purposes were “to provide for research, development and distribution of technology related to artificial intelligence” in order to “benefit the public.” The board of this entity later determined that charitable gifts and grants were insufficient to achieve its charitable purposes. It therefore created a structure designed to allow for private investment and, at the same time, to protect its charitable purposes. It created a for-profit limited partnership that elected to be treated as a corporation for tax purposes and a for-profit LLC as a subsidiary of that limited partnership. Investors in both these entities were put on notice as to the limited possibility of return on investments. Moreover, both of these entities are controlled by the board of the nonprofit entity through its ownership and control of a disregarded LLC that is the general partner of the for-profit limited partnership and the manager of the for-profit LLC.

Thus, the nonprofit entity carefully structured operations so that it retained control of both the for-profit limited partnership and the for-profit LLC. But unless the members of the board of a nonprofit fulfill their fiduciary duties, which run to the nonprofit entity in light of its charitable purposes, even the most carefully thought-out structures are for naught. It appears that the board members who ousted CEO Sam Altman, if only temporarily, had concerns about his commitment to the charitable purpose.

Indeed, the nonprofit and tax-exempt purposes of the enterprise have been lost in public discussion. It is unclear whether the newly reconstituted board can or will want to advance the company’s charitable purpose. If the new board decides to change the charitable purposes or even dissolve the charitable entity, existing charitable assets would be required to remain devoted to charitable purposes and procedures as specified under state law and the nonprofit’s bylaws followed. Challenges from private parties, such as ousted board members are possible, although unlikely [Is that right?] Whatever happens in OpenAI’s next chapter, protecting the charitable interests is likely to be a heroic task in the face of overwhelming profit-making incentives. Given the amounts at stake and the public interest in advancing charity, it is imperative that some regulatory authority remain alert.