Chan Zuckerberg Initiative – Taxable Social Enterprise – Part 2

Shortly after Mark Zuckerberg announced the social good goals of the Chan Zuckerberg Initiative and the joint pledge he made with his wife Priscilla Chan to contribute 99 percent of their Facebook shares (currently valued at about $45 billion) to the Initiative, which is structured as a limited liability company (LLC), I started getting calls from the media. They wanted to know what it meant to give money to an LLC instead of a 501(c)(3) nonprofit. I subsequently wrote a very brief post explaining the rationale for using an LLC and how the Chan-Zuckerberg Initiative was reminiscent of earlier social good efforts from some Silicon Valley titans. Since then, dozens of stories have come out criticizing and defending Zuckerberg and the couple’s use of the LLC as a vehicle in philanthropic giving.

Among the publications I spoke with about the Initiative: Fast CompanyThe Chronicle of PhilanthropyNational Public Radio (NPR), the Canadian Broadcasting Company (CBC), and Tax Analysts.

LLC Background Information

An LLC is Not a Nonprofit

  • An LLC owned by individuals is not a 501(c)(3) tax-exempt entity
    • But the LLC may very well be a pass-through entity (like a partnership or sole proprietorship) in which its profits, losses, and other tax attributes are passed through to its owners
  • A contribution to such an LLC does not allow for a charitable contribution deduction
    • But the owners may be able to take a charitable contribution deduction if and after the LLC makes a contribution to a qualified 501(c)(3) entity
    • The owners will not be able to take a charitable contribution deduction for direct contributions to, or investments in, a for-profit social enterprise (a form of impact investing); contributions earmarked for lobbying; or contributions to engage in political campaign intervention

An LLC Offers Great Flexibility and Benefits

  • An LLC can have a social good purpose and, just like any individual, can engage in charitable and philanthropic activities
    • It can make charitable contributions to public charities or to a private foundation
    • It can make charitable contributions to a donor-advised fund (allowing for an immediate tax deduction and deferred grantmaking)
    • It can make investments in for-profit social enterprises
    • It can make loans to nonprofit or for-profit social enterprises
    • It can guarantee loans made by financial institutions to nonprofit or for-profit social enterprises
    • It can enter into joint ventures with nonprofits
    • It can enter into joint ventures with for-profits without being subject to the same limitations and restrictions that would be applicable to a 501(c)(3) co-venturer
    • It can engage in lobbying without limitations that would be applicable to 501(c)(3) organizations
    • It can engage in political campaign intervention like supporting or opposing political candidates without  limitations that would be applicable to most tax-exempt organizations
  • The purposes of an LLC can be changed by its owners at any time, subject to any internal restrictions they may have created by contract
    • Accordingly, the LLC can simply turn into a regular investment vehicle at any time without public notice
  • The governance of an LLC is extremely flexible; it can be structured with just one manager or have a corporate-like board of directors
  • An LLC offers its owners limited liability protection and is a widely used vehicle for asset protection purposes
  • A privately-held LLC is not required to operate transparently to the public

A Pledge is Not the Same as a Contribution

  • An unenforceable pledge to an individual’s own LLC is not binding and is merely an expression of present intent

My Take

The LLC offers Chan and Zuckerberg a limited liability vehicle in which to organize their social good efforts. It offers the couple no additional tax benefits with respect to the deducibility of their contributions. The deduction will follow the change in control of the funds from Chan and Zuckerberg (regardless of whether held in a pass-through LLC or in their personal accounts) to a 501(c)(3) charitable entity. But a limited liability form is completely customary in any entity of that size owned by individuals.

No money has changed control yet. At this point, there is just an unenforceable pledge, albeit a very public one for an enormous amount of money. It’s fair to criticize the message (was it initially misleading or simply broadly misinterpreted as a pledge to charity?), but utilization of an LLC from which to engage in individual social good efforts is not in and of itself worthy of criticism. We’ll see a lot more of this from younger, sector-agnostic, wealthy do-gooders in the future. See A Prediction for the Nonprofit Sector.

Finally, as The Atlantic article referenced below states:

It’s too early to criticize the Chan Zuckerberg Initiative—just as it’s too early to praise it.

Recommended Reading

Mark Zuckerberg’s Philanthropy Uses L.L.C. for More Control (New York Times)

Assessing Mark Zuckerberg’s Non-Charity Charity (Atlantic)

How Mark Zuckerberg’s Altruism Helps Himself (Pro Publica)

Mark Zuckerberg wants to change the world, again. You got a problem with that? (Fusion)

5 criticisms of billionaire mega-philanthropy, debunked (Quartz)

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