Mark Zuckerberg is known for creating Facebook in a Harvard dorm room, he’s known for being an innovator of technology, for giving keynote speeches across the world. And now he aims to leave a legacy of philanthropy behind as well. Shortly after the birth of his daughter, Mark Zuckerberg and his wife, Priscilla Chan, announced in an open letter to their daughter Max that they would pledge to donate 99% of their Facebook shares, which at the time (December 1st) was valued at a whopping $45 billion.
People around the world cheered and the already joyous event of a birth was further bolstered by the charitable gesture. This wasn’t Mark Zuckerberg’s first foray into philanthropy; he and Chan donated $1.6 billion to charities before, including a $120 million donation to public schools in the San Francisco bay area. People naturally assumed something similar would be orchestrated in this instance as well. However in this instance, things are radically different.
First off, in a filing to the SEC, Zuckerberg states that he won’t give all $45 billion worth of shares away at once since doing so would mean losing voting control of his company and deny him the ability to shape the future of Facebook. He states that he will give no more than $1 billion of Facebook shares per year for the next 3 years, what happens after the 3 year period is unknown at this time. However Zuckerberg also states that he intends to retain his majority voting position at Facebook for the foreseeable future, something not possible if he sells 99% of his shares.
“On December 1, 2015, our Founder, Chairman and CEO, Mark Zuckerberg, announced that, during his lifetime, he will gift or otherwise direct substantially all of his shares of Facebook stock, or the net after-tax proceeds from sales of such shares, to further the mission of advancing human potential and promoting equality by means of philanthropic, public advocacy, and other activities for the public good. For this purpose, Mr. Zuckerberg has established a new entity, the Chan Zuckerberg Initiative, LLC, and he will control the voting and disposition of any shares held by such entity. He has informed us that he plans to sell or gift no more than $1 billion of Facebook stock each year for the next three years and that he intends to retain his majority voting position in our stock for the foreseeable future.”
– Facebook SEC filing.
Still, $3 billion over the next 3 years isn’t bad, it’s great, so where exactly is this money going? Here’s where the wrinkles start, rather than setting up a non-profit charity to gift the money to, like the Bill and Melinda Gates foundation, Zuckerberg has instead set up a limited liability company (LLC) into which the funds will be placed. So why an LLC rather than a foundation? Three reasons: the newly set up Chan Zuckerberg Initiative will be able to lobby political entities, there are no restrictions as to what the LLC can invest into and lastly, an LLC will not be required by law to disclose what it does with its money, something non-profit charities have to do.
Non profits are limited in the amount of money they can spend on lobbying and they are denied the ability to donate to political campaigns. This was the first fact that caused Zuckerberg to set up an LLC rather than a non profit; the Chan Zuckerberg Initiative can both lobby and donate to political campaigns which will shape policy and focus debates on areas of interest to them, such as curing diseases, connecting people, etc. Non profits are also restricted in how they can invest in other companies, something the Chan Zuckerberg Initiative isn’t shackled by. In fact the Initiative can even turn a profit if it invests in a profitable company and as a result can indulge in a joint venture. Zuckerberg has pledged that the profits (if any) will further the goal of the Initiative. Lastly, the lack of disclosure. It’s this last attribute of LLCs that has a bee in everyone’s bonnet. How do we know that Mark Zuckerberg is actually giving away his money to charitable causes? What if he’s secretly investing in counterfeit fruits? What if the money is actually being used to create a new kind of soap? Naturally we assume the worst in people and scores of articles have already lit up the internet with claims that Mark Zuckerberg took the LLC route to get a tax break; in essence all that he had really done was shift money from one pocket to the other in the greatest PR move in history.
However that is simply not the case. Mark Zuckerberg does not get an income tax break, anyone who has kept up with Facebook news in the previous few years would remember the moment in 2013 when Zuckerberg requested a $1 a year salary; he’s the lowest paid employee at Facebook and as a result any tax breaks he would benefit from are small enough to be negligible. Furthermore if he actually wanted a tax break, he would have gone the non profit route as non profits in the US are tax exempt. In fact when his shares are sold by the LLC, he will have to pay capital gains taxes on those shares. Zuckerberg goes on to state that by being an LLC it gives him and Priscilla more control of how they go about their philanthropic work.
“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. What’s most important to us is the flexibility to give to the organizations that will do the best work — regardless of how they’re structured.”
– Mark Zuckerberg in a Facebook post.
The fact remains though that Mark and Priscilla, through the Chan Zuckerberg Initiative, are free to spend their billions on whatever areas of interest they want. So far those areas of interest are limited to four things: personalized learning, curing disease, connecting people and building strong communities. Connecting people is especially vague since one can argue that’s the aim of Facebook itself and I’m sure people wouldn’t be too thrilled to hear about a charitable donation to the social media giant. However to allay doubts, Zuckerberg gave examples of his previous philanthropic efforts.
“Our education work has been funded through a non-profit organization, Startup:Education, the recently announced Breakthrough Energy Coalition will make private investments in clean energy, and we also fund public government efforts, like the CDC Ebola response and San Francisco General Hospital.”
In the end, $45 billion is an incredibly generous amount of money that can benefit numerous people in need and Mark Zuckerberg’s latest approach to philanthropy is opening a new and interesting path for people wishing to donate money to charities.
