What Facebook’s CEO Mark Zuckerberg’s donation teaches us about LLCs

Facebook CEO Mark Zuckerberg and his wife, Priscilla Chan, recently pledged to give away 99 percent of their lifetime net worth, or about $45 billion in Facebook shares. They will be transferring their shares to the Chan Zuckerberg Initiative, a limited liability company, which will go to causes that the two support.

While Mark Zuckerberg was at first praised for his charity and philanthropy, people have criticized his move. They claim that he should have taken his money and created a nonprofit organization. Instead, he opted to form an LLC.

Why the Chan Zuckerberg Initiative is an LLC

By not starting a nonprofit corporation and establishing the Delaware LLC instead, the Facebook founder can give to political campaigns, keep his spending private, and avoid an obligation to donate to charity. He can also invest his shares in for-profit companies and potentially make more money.

Many individuals choose to give their wealth to charity because of tax purposes. They can donate up to 20 percent of their adjusted gross income and receive tax benefits. However, on the Facebook CEO’s last tax return, it was stated that he made only $1 that year. So these tax benefits wouldn’t be of any use to him.

The Chan Zuckerberg Initiative will receive tax credits equal to the value of the Facebook stock when it donates to nonprofits. If it invests in for-profit companies, and those companies generate profits, then the Initiative will owe taxes.

LLC vs. a nonprofit: Why choose one over the other?

By starting an LLC instead of a nonprofit, Zuckerberg and Chan retain full control of their money: There is no board of directors at an LLC, and the owners decide how to manage it. While an LLC doesn't receive tax-exempt 501(c)(3) status, it has many other advantages.

An LLC is less complicated to run than a nonprofit; a nonprofit corporation has to file papers with the government to prove that its managers will try to benefit the public. If the nonprofit organization doesn’t correctly use its funds, the IRS can retract its tax-exempt status. By contrast the general objective of the LLC is to generate profits for its owners (also called “members”).

The donors who fund a nonprofit have no ownership or stake in the nonprofit itself. If it shuts down, it must give away all of its money. If an LLC closes, assets will be allocated to each owner.

Why many small businesses form as LLCs

An LLC appears to have been the best decision for Zuckerberg and Chan, and it’s also a popular choice among small businesses.

When establishing LLCs, small business owners are helping to protect themselves and their personal assets. This is because if an LLC has debt, such debt is owed by the LLC itself, rather than its owners. The result is that, as a general matter, an LLC owner is not required to use their bank account, home, or car to cover the LLC's debts.

LLCs also enjoy substantial tax benefits. The IRS classifies them as partnerships or sole proprietorships depending on how many members the LLC has. The taxes “pass through” the LLC to the owners, who report their income and claim their expenses on their personal tax returns.

In addition there can be an unlimited amount of LLC members, and the profits do not have to be distributed evenly. The members themselves decide who gets what return.

Even though most small business owners may not have the same assets as the Zuckerberg Chan Initiative, they follow the example of the Facebook founder and his wife, and organizing as an LLC may be a good choice for furthering their own business goals.