Four Reasons the Facebook Fortune Is Going Into an LLC
The decision by Mark Zuckerberg and his wife, Priscilla Chan, to gradually give away 99 percent of their Facebook fortune is big news not just for the huge sum involved—about $46 billion—but for how the couple chose to achieve their philanthropic goal. Rather than set up a private foundation or charitable trust as Bill and Melinda Gates did, the Chan Zuckerberg Initiative will be structured as a limited liability company.
It's a highly unusual step for a massive philanthropy. "I've never seen someone set up an LLC exclusively for a philanthropic purpose before," says Jane Wales, vice president of philanthropy and society at the Aspen Institute. "Normally they set up a foundation for the tax advantages of doing so." Here are some significant ways that LLC status will shape what Zuckerberg and Chan do with their wealth.
1. There won't be limits on lobbying
It seems clear the Chan Zuckerberg Initiative will put money to work in politics. Facebook, in its official description of its founder's new LLC, noted that "making private investments and participating in policy debates" will be part of the mission. In a public letter Zuckerberg wrote to his newborn daughter, Max, he likewise emphasized an appetite for pushing a policy agenda: "We must participate in policy and advocacy to shape debates." If the charitable venture had been set up as a traditional tax-exempt foundation—what is called a 501(c)(3)— it wouldn't have freedom to lobby lawmakers or engage in other political activities. The Internal Revenue Service prohibits tax-exempt groups from "directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for elective public office."
2. This charity can actually turn a profit
Profitability doesn't appear to be the aim of the new LLC. But if part of the Facebook fortune ends up invested in something that manages to turn a profit, the Chan Zuckerberg Initiative won't run the risk of possibly breaking IRS rules governing tax-exempt entities. Still, even nonprofits can earn profits without losing tax-exempt status as long as the activity is associated with the purpose of the nonprofit. Facebook has pledged that "profits from investments in companies will be used to fund additional work to advance the mission.”
3. It will be easier to do joint ventures
Traditional charities can be difficult partners for the private sector. "There are very strict restrictions on how a private foundation has to do a joint venture with a for-profit company," says Jeffrey Tenenbaum, partner and chairman of the nonprofit organizations practice at Venable. "If it's a for-profit entity, there are no such restrictions."
4. Avoiding the '5 percent rule'
The use of a corporate structure avoids a rule about having to give away 5 percent of a nonprofit foundation's value every year. “By setting up a company rather than a foundation, they can spend at the pace which makes most sense for the problem they’re trying to solve or the strategy they are pursuing,” says Wales, of the Aspen Institute. “In that sense, it gives them far greater flexibility.”