Facebook Freestyle Philanthropy

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Facebook owners Mark Zuckerberg and Priscilla Chan recently announced the largest philanthropic initiative in history, accompanying the news of their daughter’s birth.  They plan to devote about 99% of the shares they own in Facebook, which today are worth around $45 billion, for a Chan Zuckerberg Initiative (CZI) to advance human potential and promote equality.  Despite its charitable-sounding aims, CZI will be a limited liability company (LLC).  Is that philanthropy?  And why would they – or should they – use an LLC instead of the traditional nonprofit public charity model?  In a word:  freedom!

Why Not a Section 501(c)(3) Nonprofit?

The vast majority of Section 501(c)(3) organizations are public charities: nonprofits that raise money from the general public in order to provide broad public benefits to many through a board of directors and under the eyes of government regulators.  For example, if we see the red kettles of the Salvation Army, we throw in our loose change. Rather than trying to duplicate the mission of the Salvation Army ourselves, we trust the organization to responsibly carry out the work of determining where our money is best put to use. Widespread contributions to Salvation Army kettles enable enormous collective capability to help those in need. 

The other type of Section 501(c)(3) organizations are private foundations:  nonprofits that depend on a single or small pool of financial supporters for their charitable resources.  But like the public charities, private foundations must have a board of directors, provide public benefits, and operate subject to government regulators. Private foundations are also legally required to spend minimum amounts each year, on pain of tax penalties.

Through the LLC vehicle, in contrast, the CZI is not subject to similar requirements regarding public benefit, boards, or government charity regulators.   While quite unusual – and definitely not for everyone – the Zuckerberg/Chan LLC model provides excellent opportunities for highly beneficial philanthropy with optimal flexibility.

LLC Flexibility

An LLC is a creature of state law:  it functions like a corporation and is owned by individuals or other corporate entities (sometimes even a nonprofit).   No specific “charitable” purpose is required for LLCs.   The CZI’s stated purpose is to “to join people across the world to advance human potential and promote equality for all children in the next generation.”[1]  With an LLC, CZI may legally carry out this purpose entirely through charitable activities, more business-oriented pursuits, or something in between.

An LLC requires no governing board of directors or complicated governance rules.  So long as the LLC is not dedicated to holding charitable assets, it will not be subject to state charity regulators.  And provided that the LLC does not seek Section 501(c)(3) tax-exempt recognition from the IRS, it will not be subject to IRS charity rules either.  Of course, without such tax designation, the LLC is ineligible to receive tax-deductible contributions.  However, because the LLC may be operated as a “disregarded entity” for tax purposes, the LLC’s operational tax benefits may be imputed to the LLC’s owners (here, Zuckerberg and Chan) – i.e., tax-deductible contributions itself.

Which is Better?

Numerous differences exist between CZI’s very flexible LLC model and the much more constrained Section 501(c)(3) nonprofits.  For most philanthropic leaders, especially those that must seek charitable support and otherwise engage significantly within charitable circles, the tried-and-true Section 501(c)(3) nonprofit remains the standard.  But for the incredibly wealthy and trail-blazing entrepreneurs of the world, the LLC’s freedoms are worth examining.   The following table illustrates these key distinctions.

Factor

Section 501(c)(3) Nonprofit

LLC

Ownership

Irrevocably for public benefit

May be privately owned, with flexibility to give away profits or keep them

Governance

Need bylaws, to provide well developed structure

May have flexible operating agreement.

Board of Directors

Used to govern organization, providing collective wisdom, support, and financial support; but it can be difficult to recruit directors and manage the organization well through a typically volunteer board

Not required; complete flexibility

Fiduciary responsibilities of leaders

Extensive - per applicable IRS and state laws, with potential personal liability

Only ordinary business requirements

Applicable law

Detailed nonprofit laws providing for dedicated nonprofit purposes, directors, meetings, committees, dissolution, voting, indemnification, etc

Flexible LLC statutes

Beneficiaries

Must be deserving recipients within a charitable class, per applicable IRS rules 

Anyone, as determined by the LLC

Distribution of resources

Generally expected for public charities (cannot operate for profit); specific requirements for private foundations

No requirements

Distributions to charitable organizations

Allowed

Allowed, and LLC may be eligible for tax deductions (itself, or as a disregarded entity)

Exemption from federal and state tax on net income.

Yes

No

Other exemptions

Yes – state sales and property tax, depending on state; employment-related; postal

No

Program activities

Must be consistent with tax-exempt purposes; significant government restrictions apply to entrepreneurial activities, foreign involvement, joint ventures, and other creative activities.

None, except as otherwise generally applicable

Community engagement

Substantial opportunities through donor development, program activities, and other recognizably charitable activities.  May have honorary, non-governing members

Depends on leadership

Political involvement

Significant limitations apply for political campaign involvement and legislative lobbying, which can be extremely challenging in application

None, except as otherwise generally aplicable.

IRS oversight

Initial tax-exempt application, then annual Form 990 reporting, and penalties for insider benefits and other misconduct. Disclosure requirements apply for program activities, financials, donors, governance

Only to report and pay taxes

State Attorney General oversight

Must register in states where charitable fundraising solicitation activities carried out; AG offices have tremendous authority to intervene in cases of suspected charitable abuse

None, except generally applicable consumer protection laws 

Accountability to donors and other supporters.

Provided through Form 990 reporting and other means

None required

Marketing/PR

Nonprofits typically can draw donors and other supporters. through effective mission-oriented communications, through promoting their mission and building strong communities

Unknown 

Duration

Perpetual

May be limited – as intended for CZI

Disposition of assets upon dissolution.

Only to other qualified tax-exempt organizations

Complete flexibility