Zuckerbergs chose Delaware-based LLC for Chan Zuckerberg Initiative
If wielding any influence over causes celebrÃ© requires money and strategy, then Mark Zuckerberg has plenty of both.
In December, the Facebook founder and wife Priscilla Chan announced they will give $45 billion in FB stock, or 99 percent of their Facebook shares, toward “advancing human potential and promoting equality” over their lifetimes.
While the breadth of their commitment won praises, the vehicle to advance it caught some off guard.
Rather than establish a nonprofit or a foundation, the couple opted for a Delaware-based limited liability company (LLC) for their Chan Zuckerberg Initiative (CZI).
The public isn’t privy to their operating agreement, but Delaware legal and tax professionals say the Zuckerbergs may have simply opted to trade the immediate tax advantage of a foundation for the flexibility and privacy offered by an LLC.
“With an LLC, your imagination is the limit, and he’s got an incredible imagination,” said John Williams, president of The Williams Law Firm PA. “This is designed to be flexible and charity minded.”
Over the long haul of their mission that flexibility could allow for partnerships ventures, even lobbying – functions prohibited by the IRS for 501(c)(3) status.
In a December letter to his infant daughter, Zuckerberg suggested a mission-based focus on issues like personalized learning, curing disease, connecting people and building strong communities. “We must participate in policy and advocacy to shape debates,” he said.
In light of their work, Williams said the LLC does not bind Zuckerberg and Chan to the annual financial mandated by a nonprofit or foundation, and gives them the freedom to change their minds with objectives or investments.
“He might want to customize it and change it around going forward,” said Williams. “I don’t question his integrity. I suspect he wants to be able to change the vision for where he wants to go.”
Another benefit of an LLC over a foundation centers on privacy, according to Cynthia A. Hewitt, managing director and wealth management advisor with Merrill Lynch.
“The rules [of an LLC] are less restrictive,” said Hewitt. Conversely, all activities undertaken by private foundations, including contributions and grants are a matter of public record.
It’s also easier to dissolve an LLC should the missions or objectives change.
So if it’s good for the Zuckerberg-Chans, why don’t the more of the ultra-rich use LLCs as a vehicle for their philanthropy?
In short, unless your wealth is in the same stratosphere as the Zuckerbergs, there’s little reason to.
A foundation or nonprofit offers a lasting legacy as well as immediate tax deduction upon creation, and the charitable gifts can be made over time.
“There is no tax deduction when the assets are transferred into the LLC since the LLCs are not considered to be charitable organizations,” said Hewitt. “Also, the LLC is a flow-through entity meaning that any gains or losses inside the LLC will be taxable to the LLC’s shareholders.”
Brian Stratton of certified public accounting firm Horty & Horty, PA, said setting up an LLC doesn’t really accomplish much immediately, other than mitigating legal exposure.
Traditionally, an LLC is also seen as a means of protecting assets, said Stratton, who added that he’s never known anyone to set up an LLC for charity or as a philanthropic vehicle.
“LLCs must have owners,” said Williams. “Only non-stock corporations [without owners] are permitted to seek tax exempt status from the IRS,” he said. “The only exception for an LLC to be a tax-exempt charitable organization is if it owned by a non-stock corporation as a single member LLC.”
In that instance LLCs can be used to own assets as a wholly owned subsidiary of the non-stock corporation. Real estate holdings can be held through LLCs if a non-stock corporation wants to insulate itself from liabilities associated with the real estate, such as environmental contamination, according to Williams.
It is unlikely that Zuckerberg’s LLC is such a subsidiary LLC of another non-profit corporation, said Williams.
The best takeaway from the CZI Initiative may be its fodder for the water cooler – at least in legal and accounting circles.
Williams said examining any underlying motives for Zuckerberg and Chan’s decision to set up an LLC for their initiative is akin to reading a book review without access to the book itself.
“It’s a new and creative application, and whenever you have someone pushing the envelope with no precedence for it – is it fringe use,” suggested Williams. “I know that if he disclosed his LLC agreement that would generate a tremendous amount of interest.”
There are more than 700,000 active LLCs in Delaware, said Williams. Because they are subject to freedom of contract and Delaware courts give maximum discretion to document as written, it allows people to write agreement however they want.
“The limits of LLC are the limits of your imagination,” he said.
WHAT IS AN LLC?
- An LLC is a business entity that provides limited liability, meaning that it safeguards personal assets by building a wall between its owners and its business creditors. If the LLC itself cannot pay a creditor, this wall makes it difficult for business creditors to seize personal assets, such as a house, car or bank account.
- The LLC overtook corporations as the most popular form of business entity in the mid-2000’s and accounts for almost 75 percent of new businesses today. It has fewer corporate formalities than a corporation. The LLC does not require the election of a Board of Directors and appointment of officers or holding an annual meeting.
- An LLC is flexible in ownership and management structure. It is governed by an operating agreement, which is adaptable to almost any business application and allows business affairs to be arranged as the owner(s) see fit. Business uses can range from one person consulting businesses to multi-million dollar commercial properties – it may operate an active business or simply hold passive assets, like real estate or intellectual property.
- LLC owners, called Members, can choose their incorporation state. The laws of the state where an LLC is formed governs its internal affairs. Many business owners chose to form their LLC in Delaware because the liability protection afforded by Delaware law is the strongest, so personal liability resulting from claims against one’s business is unlikely in Delaware.