Using For-Profits to Funnel Big Sums to Charities Raises Transparency Concerns

Tony Cenicola/The New York Times/Redux; Facebook; Gobierno de Chile

By setting up a limited-liability company to oversee their philanthropy, Facebook founder Mark Zuckerberg and his wife, Priscilla Chan, can avoid disclosure rules, critics say, and engage in activities that stretch the definition of charity.

The couple announced Tuesday that during their lifetimes they plan to give away 99 percent of their shares in Facebook — currently worth $45 billion — to help in “improving this world for the next generation.”

Their vehicle for giving away their wealth will be the Chan Zuckerberg Initiative, a company that will give money to nonprofits, participate in public advocacy, and make investments whose profits will be used to support its work, according to Facebook’s most recent SEC filing and additional information provided to The Chronicle.

A spokeswoman for the couple said they are using an limited-liability company because it “provides great flexibility for the most impact.” The spokeswoman also said Mr. Zuckerberg was not available for interviews.

Pierre Omidyar, the founder of eBay, and his wife, Pam, helped pioneer the idea of combining business and philanthropy. In 2004, they folded their foundation into a new entity, the Omidyar Network, that operates both a philanthropic arm and a limited-liability company.

Laurene Powell Jobs, the widow of Apple co-founder Steve Jobs, also uses a limited-liability company, the Emerson Collective, to finance her giving.

Greater Freedom

Wealthy donors who set up foundations — the traditional way of disbursing huge sums to charity — get tax deductions immediately when they make the gift to start their foundations. In contrast, people who set up companies to oversee their giving generally don’t receive a charitable deduction until the company makes a contribution to a nonprofit.

However, limited-liability companies offer some advantages. For example, they don’t have the same disclosure or payout requirements that private foundations do.

Giving through an LLC rather than establishing a donor-advised fund or a private foundation will give the couple “absolute control and complete privacy,” says Marcus Owens, a Washington tax lawyer and former director of the Internal Revenue Service’s Exempt Organizations Division.

As an LLC, the Chan Zuckerberg Initiative will not have to pay out 5 percent of its assets each year, as is required of private foundations, according to Mr. Owens. It will not have to disclose the names of businesses or nonprofits it enters into contracts with, and it will not have to disclose overseas investments.

Because theirs is a private company, “they could structure their investments so they don’t generate U.S. taxable income,” creating the potential for a considerable tax shelter, he says.

Although LLCs do not have to comply with federal or state charity laws, attorneys general in many states can deem a business a common-law charity if its purpose is determined to be charitable and exercise oversight accordingly.

Maintaining Control

Mr. Zuckerberg has used both LLCs and gifts to donor-advised funds for his previous charitable gifts, including contributions totaling nearly $1.5 billion in stock to a donor-advised fund at the Silicon Valley Community Foundation.

By setting up a private company, Mr. Zuckerberg and Ms. Chan will be able to direct where they want their gifts to go, according to Tomer Inbar, a tax lawyer at Patterson Belknap. Donors who give through a donor-advised fund get an immediate tax deduction and then serve as advisers. The sponsoring organization, whether it is a community foundation or national fund, is technically responsible for deciding which charities receive grants.

“At the heart of the donor-advised fund relationship is surrendering dominion and control of your money,” he said.

The creation of an LLC means the couple will likely forgo an immediate charitable tax deduction from the annual gifts they plan to make to the company. But Mr. Owens and Mr. Inbar both say not enough is known about the structure of the LLC to determine how it would affect the couple’s tax status.

The creation of a company could bring other benefits, according to Mr. Inbar. Like a private foundation, the LLC shields the couple from personal liability for any incurred debts or any unlawful activity of employees. But an LLC will allow them to be more flexible than a private foundation in how they invest their money. Foundations that make investments from their endowments that are geared toward a social or environmental cause are required to abide by state rules on prudent investing.

Hiring Staff

The corporate structure also makes it easier to set up and staff a headquarters than it would if they established a foundation, because private foundations could invite negative scrutiny if they spent a lot on buildings and salaries, according to Mr. Inbar.

“They can decide they want to pay a lot of money to get people to move to the Bay Area” to work for their company, he says.

Mr. Omidyar cited impact investing’s potential for social good when he talked to The Chronicle in 2011 about setting up the Omidyar Network.

“If you’re trying to make the world a better place, doing so by only focusing on tools in the nonprofit sector is like operating with one hand tied behind your back,” he said. The business world, he says, has shown that it has the ability to help large enterprises grow quickly and sustainably. To tackle big social problems, size is critical.

As an example, Mr. Omidyar pointed to the investment the network made in Bridge International Academies, a company that operates a chain of low-cost primary schools in Africa.

“When a nonprofit says, ‘Hey, we’re going to have 3,000 schools in seven years,’ it’s a lot harder to believe them, because they don’t have a sustainable economic model,” said Mr. Omidyar. “But when you see an organization go and they’re running 20 schools, and they’re making money on those schools, you think, ‘Wow, the sky’s the limit.’ "