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 decided that forming an LLC would be the wisest decision.
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 any of it to charity. He can also put shares into for-profit companies and 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. The 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 they donate to nonprofits. If they invest in for-profit companies, and they generate profits, then they 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 they don’t receive tax-exempt 501(c)(3) status, they acquire 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 and benefit the public. If the nonprofit organization doesn’t correctly use its funds, the IRS can retract its tax-exempt status. The objective of the LLC is to generate profits for its members.
Those who fund the nonprofit, the donors, 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 member.
Why Small Businesses Go For LLCs
An LLC was the best decision for Zuckerberg and Chan, and it’s also a popular choice among small businesses.
When they’re establishing LLCs, small business owners are protecting themselves and their personal assets. This means that if an LLC has debt, the money is paid to those owed through the LLC. An owners’ bank account, home, or car cannot be used to cover any LLC debts.
LLCs are also given big tax benefits. The IRS classifies them as partnerships or sole proprietorships depending on whether there are one or two owners. The taxes “pass-through” the LLC to the owners, who report their income and claim their expenses on their personal tax returns.
There can be an unlimited amount of LLC members, and the profits do not have to be distributed evenly. The owners decide amongst themselves who gets what return.
Small business owners may not have the number of assets that Zuckerberg and Chan do, but they can be on their way to catching up with the Facebook founder and his wife. It all starts with officially establishing themselves with an LLC.