When Facebook founder Mark Zuckerberg and his wife Priscilla Chan announced earlier this week they were giving 99% of their Facebook shares to a new charitable organization they had set up, the public reaction was surprisingly mixed. While many people applauded Zuckerberg’s charitable decision to honor the birth of his daughter, some noted setting up the $45 billion Chan Zuckerberg Initiative as a for-profit limited liability corporation can be seen as self-serving. That’s because an LLC structure not only saves billions in taxes and provides additional legal protection, but avoids the regulations of a charitable foundation and provides much greater flexibility over how the money is spent.
Of note, the mission of the Chan Zuckerberg Initiative focuses on “personalized learning, curing disease, connecting people and building strong communities.”
Chan Zuckerberg Initiative set up as an LLC
Most big philanthropists have set up nonprofit organizations to make charitable donations. Federal tax law requires charities and foundations to spend at least 5% of the value of their endowment every year for charitable purposes.
A limited liability company, however, is quite different. An LLC is somewhere between a corporation and a business partnership. An LLC structure can provide numerous tax and other benefits, and perhaps most importantly to young billionaires, it also offers more control.
With an LLC, Zuckerberg and Chan have the flexibility to invest in for-profit social enterprises and supporting political causes because an LLC has fewer rules than a traditional foundation. Critics note this means that the pair can choose to spend the money on just about whatever they want, which they say means the Chan Zuckerberg Initiative is not a “charity”, but just a way for Zuckerberg to spend his money how he pleases while getting a big tax break and reducing any legal liabilities for his actions.
Also keep in mind that an LLC does not require disclosures of public tax documents like a nonprofit, and the pair can choose to spend any profits as they want. Critics say an LLC is really more along the lines of a private investment vehicle for the couple than a “donation”.
Moreover, if the L.L.C. is sued, the partners’ personal assets are exempt. Finally, the pair will be taxed as individuals on any gains in the LLC.
Statement from Zuckerberg
Zuckerberg released a new statement on Facebook on Friday defending his decision to set up the initiative as an LLC: “The Chan Zuckerberg Initiative is structured as an LLC rather than a traditional foundation. This enables us to pursue our mission by funding non-profit organizations, making private investments and participating in policy debates — in each case with the goal of generating a positive impact in areas of great need. Any net profits from investments will also be used to advance this mission.
By using an LLC instead of a traditional foundation, we receive no tax benefit from transferring our shares to the Chan Zuckerberg Initiative, but we gain flexibility to execute our mission more effectively. In fact, if we transferred our shares to a traditional foundation, then we would have received an immediate tax benefit, but by using an LLC we do not. And just like everyone else, we will pay capital gains taxes when our shares are sold by the LLC.”