Zuckerberg’s Philanthropy Uses LLC for More Control

The Chan Zuckerberg Initiative, the organization that the Facebook chief executive Mark Zuckerberg and his wife, Priscilla Chan, introduced this week, has three important letters at the end of its name: LLC.

LLC stands for limited liability company, which is a specific type of business structure. The use of such an entity, revealed on Tuesday when the couple said they intended to give away 99% of their shares in Facebook during their lifetimes, shines a spotlight on an atypical but increasingly popular financial vehicle in philanthropy.



Traditionally, philanthropists have set up nonprofits to make charitable donations. Under the federal tax code, charities and foundations are required to spend a minimum of 5% of the value of their endowment every year for charitable purposes. There is also a nonprofit tax designation for advocacy groups, like the Sierra Club or the American Civil Liberties Union.



But a limited liability company is a structure that acts partly like a corporation and partly like a business partnership. The structure can provide benefits, and specifically one important advantage to the young billionaires: more control. (Some of them are giving away money earlier in their careers compared with benefactors of past eras — like the Rockefellers and Andrew Carnegie, who largely began their philanthropy closer to the ends of their lives.)



The LLC structure gives Zuckerberg and Chan more flexibility in investing in for-profit social enterprises and also supporting political causes, allowing them a freer hand. That is because an LLC has fewer rules than a traditional foundation, such as the 5% requirement.

An LLC also does not necessitate the same kinds of disclosures of public tax documents, and the couple can choose to disburse any profit from the LLC however they wish. In all those ways, the LLC acts more like a private investment vehicle for the couple.



In addition, there are some legal and tax benefits. If the LLC is sued, the couple’s personal assets are exempt from consideration. Zuckerberg and Chan will also not face additional tax burdens with an LLC, but instead are taxed as individuals on any gains the LLC sees.

“It’s buying optionality, so that down the road they could still decide to direct money to nonprofits or they could choose to invest in really cool solar energy companies that are doing a lot of good,” said Jacob Harold, the chief executive of GuideStar, a national database about nonprofits. “It will enable the creative and flexible use of capital over time.”



Zuckerberg, 31, and Chan, 30, registered the Chan Zuckerberg Initiative LLC in Delaware last week, according to a filing. The couple, who announced the initiative in the form of a letter to their newborn daughter, Maxima Chan Zuckerberg, has estimated that their current Facebook holdings are worth more than $45 billion.

In a statement, a Facebook spokeswoman said, “As Mark and Priscilla have made clear, they believe the mission is best advanced by a combination of activities, including funding nonprofit organizations, making private investments and participating in policy debates.”

While many tech billionaires like the Google co-founders Larry Page and Sergey Brin have adopted a typical nonprofit structure — known as a 501(c)(3) — for their foundations, LLCs are increasingly taking root among other Silicon Valley donors.



Pierre Omidyar, an eBay co-founder, has set up the Omidyar Network, which has taken a hybrid approach by operating as both an LLC and a nonprofit structure. Laurene Powell Jobs, the widow of Steve Jobs, the former chief executive of Apple, has formed the Emerson Collective, an LLC dedicated to supporting issues on “education, immigration and innovation.”

Zuckerberg and Chan may now popularize the LLC form even further.



“If I was Zuckerberg or one of his friends, and I was giving away multiple billions of dollars, I don’t know what’s going to be important hundreds of years from now,” said Scott A Bishop, director of financial planning at STA Wealth Management. “In the long run, an LLC is best for that type of flexibility.”

In adopting an LLC approach, Zuckerberg is breaking from one of his childhood heroes, the Microsoft co-founder Bill Gates, who set up the Bill & Melinda Gates Foundation, and who now works on issues such as climate change and eradicating malaria. Gates’s group in 2006 created a hybrid trust and foundation structure, but is not set up as an LLC.



Emmett D Carson, the chief executive of the Silicon Valley Community Foundation, a charitable organization with $7 billion in assets under management, said tech philanthropists were turning to a variety of novel giving tools including LLCs, donor-advised funds and for-profit businesses with charitable arms. That is because they are accustomed to developing or embracing new tools to disrupt the status quo, he said.

“We are at the cusp of a new renaissance in philanthropy, where younger donors in the tech industry are making commitments at a much younger age and are prepared to make much larger commitments,” Carson said. “They are using various hybrid tools to carry out that philanthropy here at home, but also around the world.”

There are drawbacks to LLCs, too. Unlike with a traditional nonprofit, an LLC doesn’t allow for a large tax deduction when you initially put money in; a tax break takes effect only when money is donated to charities or foundations.

In the couple’s giving announcement, Zuckerberg and Chan said they planned to tackle some of the biggest problems their daughter’s generation might face, including heart disease and cancer, and suggested they would finance research and technologies to address underlying causes of these diseases. They pledged to give away $1 billion a year for the next three years.

“Medicine has only been a real science for less than 100 years, and we’ve already seen complete cures for some diseases and good progress for others,” the couple wrote in the letter on Facebook. “As technology accelerates, we have a real shot at preventing, curing or managing all or most of the rest in the next 100 years.”

The article originally appeared on The New York Times, a partner of The Express Tribune.