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LLC Tax Benefits and Charitable Planning

The news in philanthropy over the last few months has been about Mark Zuckerberg and his $45 billion gift (or was it a gift?) of 99% of his Facebook stock to charity. What is all the hubbub about? What did he actually do? Why is he being both praised and criticized for taking this step? What does this mean for nonprofits going forward?

Many philanthropists, when they want to make a large contribution like this, will set up their own private foundation to receive the gift. For example, Bill and Melinda Gates donated shares of Microsoft to the Bill and Melinda Gates Foundation and it is now the largest foundation in the United States. What Mark Zuckerberg and his wife Dr. Priscilla Chan are doing is transferring Facebook shares to a Delaware limited liability company (LLC) named the Chan Zuckerberg Initiative. This is not a new technique used to engage in philanthropic activities. Previously, Laurene Powell Jobs, Steve Jobs’ widow, created the Emerson Collective, also an LLC.

How does the Charitable LLC work?
The Chan Zuckerberg Initiative will not be a 501(c)(3) tax-exempt entity. It will be treated as a pass-through entity for income tax purposes, thus all of the income, expenses and other tax attributes will flow through to the members (the Zuckerbergs) who will report that income on their individual income tax return. Because Facebook stock does not currently pay dividends, there may be little taxable income to pass out to the Zuckerbergs.

Because it is not a private foundation, the Zuckerbergs will not receive a charitable contribution deduction when they contribute their stock to the LLC. But this may not matter to them because without Facebook paying dividends, their income is most likely not high enough to take advantage of the charitable deduction. If they had made the contribution to a private foundation, the charitable contribution that they could take each year would be limited to 20% of their adjusted gross income. This could be carried over for five years, but they would never be able to utilize the full tax deduction of $45 billion.

If the Chan Zuckerberg Initiative does decide to make contributions to charity, as a pass-through entity, the LLC would pass those deductions out to the Zuckerbergs. Instead of giving cash to the charities, the LLC would most likely give appreciated Facebook stock to the charity. This would produce a charitable deduction equal to the fair market value of the stock at the date of the gift, but would not trigger any capital gain recognition at the LLC level, and the Zuckerbergs would therefore avoid paying capital gains tax on the shares gifted.

Using a charitable LLC avoids many of the requirements and restrictions that are imposed on private foundations. An LLC is not required to file a Form 990-PF Return of Private Foundation, which is open for public inspection. An LLC also does not have to meet the five percent annual distribution requirement that applies to private foundations. There is no requirement to limit the amount of stock and other interests in business enterprises that can be held, called the “excess business holdings rule.” There is no requirement to follow the “jeopardy investment rule” limiting the type of investments that can be made including speculative investments in start-up companies. The “self-dealing rules,” limiting transactions from taking place with founders would not apply, and expenditures for political and lobbying purposes can be made because the “taxable expenditures rules” would not apply as they do with private foundations.

Criticism of the LLC Plan
Critics of the Zuckerbergs plan say they did not make a charitable contribution, which is true. However, they will be placing the stock in the LLC which was created for charitable purposes. The stated purpose of the Chan Zuckerberg Initiative is “to join people across the world to advance human potential and promote equality for all children in the next generation.” Mark Zuckerberg explains his use of the LLC in the quote below:

“The Chan Zuckerberg Initiative is structured as an LLC rather than a traditional foundation. This enables us to pursue our mission by funding nonprofit organizations, making private investments and participating in policy debates – in each case with the goal of generating a positive impact in areas of great need. Any net profits from investments will also be used to advance this mission. 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.”

Jesse Eisinger, in his article “How Mark Zuckerberg’s Altruism Helps Himself,” is highly critical of the Zuckerberg plan and states “an LLC can invest in for-profit companies (perhaps these will be characterized as societally responsible companies, but lots of companies claim the mantle of societal responsibility). An LLC can make political donations. It can lobby for changes in the law. He (Zuckerberg) remains completely free to do as he wishes with his money. That’s what America is all about. But as a society, we don’t generally call these types of activities “charity.”

Eisinger continues: “What’s more, a charitable foundation is subject to rules and oversight. It has to allocate a certain percentage of its assets every year. The new Zuckerberg LLC won’t be subject to those rules and won’t have any transparency requirements.”

What Does this Mean for Nonprofits Going Forward?
The used of the charitable LLC is a compelling option for philanthropists. Interest in an execution of this type of plan continues to grow. Grantwriters need to become familiar with the increasing use of charitable LLCs by philanthropists. Unlike with a private foundation, the LLC tax forms will not be available to the public. Julie Johnson in her online article “How Do Grant Writers Need to Consider Charitable LLCs?” has the following suggestions:

  • If LLC has a website, visit it regularly. Watch for online application openings.
  • Follow the LLC in the news media. Sign up for Google alerts with the LLC name.
  • Seek the LLC on social media and follow. (Facebook is an obvious follow for CZI!)
  • If LLC has a blog or newsletter, subscribe
  • Identify if anyone in your NPO has a contact with anyone in the LLC

The forward-thinking nonprofit organization will take this all into consideration. Rather than criticizing the Zuckerbergs for what they have done, it would be more beneficial to determine how to make this trend work to your organization’s advantage by gaining the attention of similarly-missioned charitable LLCs.

For more information or questions about how this feature affects your plan, please contact Donita Joseph at or by phone at 844.4WINDES (844.494.6337).
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