Chan Zuckerberg Initiative Highlights Popularity of LLCs, Concerns

The decision by Facebook CEO Mark Zuckerberg and his wife, Priscilla Chan, to give 99 percent of their Facebook shares to a limited liability corporation that will support efforts over the coming decades to advance human potential and promote equality has raised concerns in some quarters, the New York Times and Chronicle of Philanthropy report.

As a limited liability company, or LLC, the Chan Zuckerberg Initiative will be structured partly like a corporation and partly like a business partnership. As such, it will afford the couple more control over their assets and expenditures than a private foundation would, including greater flexibility in investing in for-profit social enterprises and supporting political causes, as well as fewer regulations like the 5 percent payout requirement and public disclosures of tax documents to contend with. While the couple will not receive an immediate charitable tax deduction for any shares they give to the initiative, as they would with a foundation or public charity, the deduction will kick in when the initiative begins to make grants to nonprofits. Another advantage is that the couple will not have to disclose the initiative's contracts with for-profit businesses or nonprofits or the nature of its overseas investments.

"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," GuideStar CEO Jacob Harold told the Times. "It will enable the creative and flexible use of capital over time."

An LLC also affords donors more control than another increasingly popular giving vehicle, the donor-advised fund, Tomer Inbar, a tax lawyer at Patterson Belknap, told the Chronicle. That's because with a donor-advised fund, the sponsoring organization, whether it's a community foundation or a national DAF manager like Fidelity or Vanguard, technically is responsible for deciding which charities receive allocations from the funds they administer. "At the heart of the donor-advised fund relationship is surrendering dominion and control of your money," said Inbar.

Other Silicon Valley philanthropists who have chosen to set up LLCs include eBay co-founder Pierre Omidyar, whose Omidyar Network operates both an LLC and a philanthropic arm, and Laurene Powell Jobs, whose LLC, the Emerson Collective, is dedicated to supporting initiatives in education, immigration, and innovation. Laura Arrillaga-Andreessen, who teaches philanthropy at Stanford University, has her own foundation, and is a close friend of Powell Jobs, told the Times in 2013 that LLCs are becoming more popular among high-net-worth donors seeking flexibility, freedom, and anonymity in their investments. "The beauty of having an LLC in today's world is, number one, you have the ability to act and react as nimbly as need be to create change," said Arrillaga-Andreessen, "and you have the ability to invest politically, in the for-profit sector, and the nonprofit sector simultaneously."

Critics, however, told the Chronicle that an LLC allows philanthropists to avoid disclosure rules and to engage in activities that sometimes stretch the definition of charity. An LLC gives Chan and Zuckerberg "absolute control and complete privacy," said Marcus Owens, former director of the Internal Revenue Service's Exempt Organizations Division. "[T]hey could structure their investments so they don't generate U.S. taxable income," creating a significant tax shelter.

The fact that an LLC, unlike foundations and charities, is allowed to lobby for political causes also is cause for concern. "People like Zuckerberg and Gates," writes the New Yorker's John Cassidy, "by virtue of their philanthropic efforts, can have a much bigger say in determining policy outcomes than ordinary citizens can."

Natasha Singer, Mark Isaac. "Mark Zuckerberg's Philanthropy Uses LLC for More Control." New York Times 12/02/2015. Nicole Wallace, Alex Daniels. "Using For-Profits to Funnel Big Sums to Charities Raises Transparency Concerns." Chronicle of Philanthropy 12/02/2015. John Cassidy. "Mark Zuckerberg and the Rise of Philanthrocapitalism." New Yorker 12/02/2015.