Thursday, December 3, 2015

Back Off the Chan Zuckerbergs and Their Limited Liability Company (NOT Corporation)

Facebook (not surprisingly) and other social media blew up when Facebook CEO, Mark Zuckerberg, and his wife, Dr. Priscilla Chan, released an open letter to their new baby daughter, Max. (Congratulations to all, by the way.) The Chan Zuckerberg family announced that they would be giving a ton of money to support important causes, which caused people to get excited, get skeptical, and get mad.

One big complaint has been that the family chose a limited liability company (LLC), which is not a corporation (more on that later), rather than a not-for-profit entity to do the work.  Some say this makes it a scam.  I say hooey.  Even if it were a scam, it’s not because they chose an LLC. 

  1. First, without knowing the LLCs members or structure, there’s no reason to say the LLC cannot be a 501(c)(3). But, more important, the Letter to Max never says they will give money to charity.  Never. 

The letter says: 

As you begin the next generation of the Chan Zuckerberg family, we also begin the Chan Zuckerberg Initiative to join people across the world to advance human potential and promote equality for all children in the next generation. Our initial areas of focus will be personalized learning, curing disease, connecting people and building strong communities.

We will give 99% of our Facebook shares -- currently about $45 billion -- during our lives to advance this mission.  

How the Chan Zuckerberg’s choose to advance that mission can easily be through an LLC, whether it is tax-exempt or not.  They may have chosen the for-profit (or benefit) LLC as the entity so that they could seek profit in certain ways, with the thought that the profit seeking supports the mission.  Or maybe they want to be able to give to for-profit entities to build and grow business in areas that further their mission, but lacks status that would satisfy IRS nonprofit requirements.

Regardless, the choice of LLC may be a good one.  I am thinking these folks have good counsel and financial advisors, so the entity choice probably serves their purposes, or at least their best estimate of those future purposes.  And I am all for them putting that kind of money behind what seems to me like an excellent mission.  So, like them or hate, but back off their choice of entity. (Leave the LLC alone!)

And, since this would not be a post of mine without noting the utter media failure in referring to the LLC, again, it’s a limited liability company, not corporation, as several news outlets have reported.  PBS tends to be my favorite news source, which makes it all the more painful that they may be the source of this limited liability corporation nonsense. 

The apparent source of the limited liability “corporation” nonsense is the PBS Newshour, link here.  I know the U.S. Supreme Court has gotten this wrong, too,  but I had hope for better from PBS.  Oh well.  I'll still be listening to PBS for quality news, and I'll still be happy to hear when someone commits to putting billions of dollars behind good causes.  If either one doesn't follow through, I'll be disappointed, but I am not ready to give up hope on either one, just yet.

Current Affairs, Human Rights, Joshua P. Fershee, LLCs, Nonprofits, Social Enterprise, Unincorporated Entities | Permalink


Thanks, Josh. The reporting on this has been driving me crazy - it's so imprecise in terms of describing what LLCs are and the relationship to 501c3.

Posted by: Ann Lipton | Dec 3, 2015 5:26:41 PM

It's my understanding that they chose an LLC vs. a 501(c)(3) so that they can lobby. But I'm more excited that I've had more than one student in the midst of exam season email me about the news story saying they wish we were still in class to discuss why they chose an LLC!

Posted by: MARCIA NARINE | Dec 3, 2015 6:24:45 PM

The NYT has a "Room for Debate" on this topic. Embarrassingly, Jack A. Blum (lawyer and chairman of Tax Justice Network USA) refers to the LLC as a "limited liability corporation." Such a widespread problem.

Posted by: Haskell Murray | Dec 3, 2015 6:47:15 PM

Great post, Josh. You make some excellent points--including by continuing your well-trod path to try to distinguish corporations from LLCs. But the IRC Section 501(c)(3) point also is incredibly salient. Thanks for attempting to set the record straight on all this.

Posted by: joanheminway | Dec 3, 2015 7:13:33 PM

So, had to log in to comment on this one!

So, LLCs aren't nonprofit because they don't have a nondistribution constraint (they can't distribute profits) in the Hansmann terminology. Thus, that is a true statement.

Since the nondistribution constraint is a requirement of Section 501(c)(3) ("no part of the net earnings inure to the benefit of any private shareholder), the LLC can only be a Section 501(c)(3) is it basically drafts itself a nondistribution constraint. Per the EO text you cite (which is an internal IRS CLE document and really had little precedential value but we all follow it anyway), the only way that a LLC can be tax exempt under 501c3 is to have only nonprofit members. It would also have to check the box to be taxed as a corporation.

An additional issue is that in some states, LLCs must be formed for "business purposes" - Indiana was one of them. In those states you had to get an opinion of counsel that the LLC could engage in non -business (i.e. charitable) stuff - a hard opinion to give as there really is no law in most states. Some states had a nonprofit LLC at this time (I want to say Tennessee and Minnesota but I've not slept at a Holiday Inn any time lately), and of course, that document predates the LC3. But even the LC3, which could have a charitable purpose, would need to have other tax-exempt members to get around the nondistribution constraint.

Therefore, the 501c3 LLC is exceedingly rare and usually only comes up in the context of joint ventures among charitable organizations.

Part 2 to follow...

Posted by: Elaine Wilson | Dec 3, 2015 10:20:52 PM

My understanding is that the LLC is a straight up for-profit, thus avoiding the lobbying limitations but also some of the private inurement and private benefit issues that arise with doing high end impact investing. This would also make sense as it would be much easier for them to be in some these impact investing private equity or fund opportunities in entity form rather than individually. The excise taxes applicable to private foundation make this type of investing significantly more difficult.

I think those in the press that are getting the vapors may be having an issue with the fact that they sort of represent that funds are going to charity, but my understanding of the current structure is that really nothing is irrevocably dedicated or permanently endowed (could be wrong on that, but haven't seen anything to the contrary). It may be part of their long term plan, but I'm not sure. As a result, however, they wouldn't be entitled to a charitable income tax deduction currently, so I'm not really sure why it matters.

Posted by: Elaine Wilson | Dec 3, 2015 10:25:41 PM

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