Media coverage was hard-pressed to keep up with the fast-moving drama of Sam Altman’s ouster and reinstatement as CEO of OpenAI. But the focus was on the wrong actor. OpenAI is not just another tech behemoth. It is a set of entities constructed to advance the legal purposes of a nonprofit, tax-exempt charitable corporation. The nonprofit and its tax-exempt charitable purposes, rather than Altman, should have been the star of the show.

OpenAI started as a tax-exempt, nonprofit company organized in Delaware (let’s call that “Nonprofit-OpenAI”). The board later determined that charitable gifts and grants were insufficient to achieve Nonprofit-OpenAI’s charitable purpose. It therefore created a structure designed to allow for private investments and, at the same time, to protect its charitable purposes. Nonetheless, the protection of those purposes depends on how the members of the board exercise their fiduciary duties.

The relationships between the entities known as OpenAI were intended to ensure that charitable purposes drove the entire enterprise. Central to that structure is OpenAI LP, a for-profit limited partnership (let’s call that “For-Profit-LP”), reportedly  worth about $80 billion to $90 billion. When outsiders and employees invested in For-Profit-LP, they all agreed to cap their maximum financial returns and signed a partnership agreement specifying that For-Profit-LP would be both governed by Nonprofit-OpenAI’s board and operated in accordance with Nonprofit-OpenAI’s charitable purposes. 

OpenAI also created a subsidiary of For-Profit-LP, OpenAI LLC (let’s call that “For-Profit-LLC”), of which Microsoft is a minority owner and For-Profit-LP is the majority owner. For-Profit-LLC’s operating agreement cautions that “it would be wise to view an investment in [For-Profit-LLC] in the spirit of a donation, with the understanding that it may be difficult to know what role money will play in a post-AGI [artificial general intelligence] world.”

Importantly, all these entities are controlled by the board of Nonprofit-OpenAI through its ownership and control of OpenAI GP LLC (let’s call this “Disregarded-LLC”), a disregarded entity for tax purposes and the general partner (with some ownership share that we do not know) of For-Profit-LP, as well as the manager of For-Profit-LLC.

In short, Nonprofit-OpenAI’s charitable purposes were meant to guide the whole operation. Those purposes, found in Nonprofit-OpenAI’s Delaware certificate of incorporation, are “to provide for research, development and distribution of technology related to artificial intelligence. The resulting technology will benefit the public and the corporation will seek to open source technology for the public when applicable.”

However, unless the members of the board 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. The board members who ousted Altman, the majority of whom were independent with no interest in OpenAI’s for-profit entities, seemed to be concerned with their increasing inability to supervise the CEO, including determining whether Altman was advancing the nonprofit purposes. If so, the board members who ousted Altman were acting responsibly, fulfilling those fiduciary duties by assessing whether Altman was managing the company to advance its legal purposes.

Why have the nonprofit and tax-exempt purposes been lost in public discussion about the OpenAI debacle? Perhaps the sheer size of the dollars at stake makes it hard to focus on the purposes listed in documents drafted seemingly long ago. As striking as it was that almost all of OpenAI’s employees threatened to quit if Altman was not reinstated, their protest letter may have meant more if those employees did not have an interest in cashing in on the company’s $80 billion to $90 billion valuation. The outside investors, of course, face similar incentives.

How can charitable purposes and interests be protected in the face of such strong incentives to profit? A reconstituted board could decide it wants to take Nonprofit-OpenAI in a direction inconsistent with its charitable purposes and dissolve the charity, as some observers have suggested. The board could also decide to alter the charitable purposes to ease the for-profit ends. Either way, it must do so via procedures specified in the corporate bylaws and applicable state law. Those procedures typically require notice to regulators as well as oversight to protect any charitable interests.

Regardless of which of these two paths the board chooses, the existing charitable assets must remain devoted to charitable purposes. Whether the laws of Delaware or another state with jurisdiction require existing assets to remain devoted to OpenAI’s particular charitable purposes depends on both the state and the nature of the restrictions on those assets. Delaware case law considers a charity’s general charitable assets to be devoted to that charity’s purposes. Operating in parallel, federal tax law requires exempt charities in Delaware to state in their certificates of incorporation that all assets remaining after payment of debts and liabilities be distributed to another section 501(c)(3) organization or a federal, state, or local government for public purposes.

Whatever happens in OpenAI’s next chapter, protecting the charitable interests is likely to be a heroic task in the face of the overwhelming profit-making incentives. The depleted budgets of state and federal regulators will make it hard for them to weigh in effectively. If OpenAI fails to follow the requirements of its state nonprofit and federal tax-exempt status, the risk is that For-Profit-LP and its for-profit subsidiary would subordinate the nonprofit purpose to their profit-making interests. Given the amounts at stake and the public interest in advancing charity, it is imperative that some government authority remain alert.

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.