December 17, 2015
When Mark Zuckerberg and his wife Dr. Priscilla Chan welcomed their first child, Maxima Chan Zuckerberg, into the world last month it was not only a momentous occasion for the famous young family, but the presumed catalyst for another recent Zuckerberg-Chan collaboration that will change the direction of American philanthropy for decades to come.
This is because their daughter’s birth was also cause for reflection for the new parents about the kind of world in which their daughter will grow up.
This is ostensibly why the new parents announced on December 1, 2015 that over the course of their lives, they have pledged to give 99% of their own Facebook shares to a new entity they have created called the Chan Zuckerberg Initiative.
At their current valuation, these shares represent upward of $45 billion. (Perhaps coincidentally, a few billion more than the trust endowment of the Bill & Melinda Gates Foundation, currently the world’s largest charitable foundation.)
In an open letter to his newborn daughter, Mark Zuckerberg details his vision for her future: “Our society has an obligation to invest now to improve the lives of all those coming into this world, not just those already here.”
While this announcement heralds what promises to be the largest philanthropic gesture in history, some in the nonprofit community are hopeful that, despite initial misgivings, the Chan Zuckerberg Initiative (CZI) will prove to be more than just that: a gesture.
What Makes the Chan Zuckerberg Initiative Different
The newly-christened (pardon the pun) Chan Zuckerberg Initiative is really an extension of years of previous forays by the famous couple into the nonprofit world.
In addition to the nonprofit grantmaking organization founded in 2010, last summer the couple incorporated a Delaware-based entity called Zuckerberg Education Ventures, LLC., the vehicle through which CZI will reportedly be making its first investments.
Note the use of the term “investments” — not “donations”.
By incorporating CZI as a limited liability corporation (LLC) and not a 501(c)3 charitable organization, the famous millennial couple has made an increasingly popular move for many deep-pocketed philanthropists.
Following in the footsteps of eBay’s founder, Pierre Omidyar, CZI continues the tradition of “impact investing“, which is essentially supporting nonprofit organizations in addition to selected for-profit entities that are committed to promoting charitable causes.
The stated reasoning for this, according to Zuckerberg: “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.”
LLCs as Charitable Ventures
So what does this all mean for the future of philanthropy?
According to a recent Facebook post by Zuckerberg himself, he and his wife have deliberately chosen to structure their “non-foundation foundation” as an LLC for multiple reasons:
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.
And here are some of not so widely-touted benefits of making CZI an LLC, according to an Forbes:
Zuckerberg will still control the Facebook shares that are “owned” by CZI
If he had created a charitable foundation, he would lose control of those shares once he donated them to the foundation
Charitable foundations can’t do lobbying activities, but LLCs can.
Charitable foundations also can’t make political donations; LLCs can.
CZI will not be required to publicly disclose the salary of its top five executives
Charitable foundations are required to do so in their annual 990 filings, which are public documents.
A charitable foundation cannot own more than 10% of a company’s stock.
If at some point he chooses to move 10% of Facebook stock into his Chan Zuckerberg Initiative, he is free to do that.
In the end, only time will tell whether the Chan-Zuckerberg Initiative turns out to be a boon for humanity… or simply a clever marketing ploy.