Disruptive Philanthropy: Zuckerberg, the Limited Liability Company, and the Millionaire Next Door

• In Event: Bequests and Major Giving

Abstract

Facebook founder Mark Zuckerberg and his wife, Dr. Priscilla Chan, announced they would give 99% of their net worth to – in their words – “advance[e] human potential and promot[e] equal opportunity.” To make good on this promise, however, they did not set up a traditional nonprofit, tax-exempt organization. Instead, they founded the Chan-Zuckerberg Initiative, a for-profit, limited liability company (LLC). The bulk of this paper provides the definitive explanation for this seemingly bizarre choice.

There is a persistent strain of concern, running back at least as far as the Gilded Age, that charitable endeavors allow the wealthiest to sanitize their tremendous advantage and further increase their influence over society. Chan and Zuckerberg are easily painted with this broad brush. By organizing as a for-profit limited liability company, however, Chan-Zuckerberg appears to avoid one particularly trenchant strain of this criticism. Donating funds to CZI does not create an immediate tax write-off for its founders. Chan and Zuckerberg must pay federal and state tax on income they receive from CZI. They must pay state and local property taxes on any real estate it owns and sales taxes on any purchases it makes. If they die owning interests in it, these interests will be part of their taxable estates. CZI is simply not a tax-exempt institution, and its philanthropic efforts must proceed without access to the array of subsidies such entities receive.

The paper explains that CZI is not the first philanthropic institution to structure itself as an LLC, and explores the powerful arguments for adopting this innovative organizational design. It draws on legal sources to demonstrate the principal benefit of the philanthropy LLC structure: flexibility. An LLC allows donors to bolster charitable grant making with impact investment and political advocacy – and to do so free of the restrictions, penalties, and transparency requirements that apply to tax-exempt vehicles. Opting into the LLC legal regime also provides donors with complete control over the organizations they found, including the ability to reclaim donated assets, which is absolutely prohibited in nonprofit forms. The paper further shows how, with careful planning, all of these advantages can be gained at relatively little tax cost. This analysis reveals that high-tech philanthropists with sophisticated counsel have good reasons to seize on the LLC approach.

The paper further argues this attractive blend of significant benefits with little increased tax burden means the philanthropy LLC is poised to spread far beyond Silicon Valley. Drawing on research documenting the growing ranks of global millionaires and billionaires, it argues this development would have the potential to do both great good and great harm. In its concluding section, the paper turns to the normative questions often posed about the dangers of foundation and philanthropy. It grapples with the work of political scientists and philosophers to consider how abandonment of the legal structures designed to channel and delimit the philanthropy of society’s most powerful elites can magnify their anti-democratic influence.

Author

• Dana Brakman Reiser, Brooklyn Law School