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Does legal status matter?


The debate over philanthropic LLCs

Mark Zuckerberg’s choice to use the legal structure of an LLC for his philanthropic endeavors has been making headlines for the last several months. When he sold $95m worth of his shares in June the storm started again with Wired saying “He’s No Hero Yet” and The Chronicle of Philanthropy asking whether John D. Rockefeller would have started an LLC too.

I’m trying to understand what all the controversy is about and I think it comes down to a couple beliefs we have:

  1. Social change is done through nonprofits, so don’t call it “charity” if it’s not going to nonprofits;
  2. LLCs are less transparent than 501(c)(3)s.

This is certainly a vast oversimplification but I find the fact that people view this as a controversy really interesting. Here is a young billionaire pledging to use the vast majority of his wealth for social good. Isn’t that a good thing? I certainly wouldn’t have predicted it to be so controversial.

I think the first belief stems from what I might argue is a slightly outdated version of doing social good. I think it’s the idea that capitalistic and philanthropic goals are at odds with one another and can’t be achieved simultaneously. If that’s true, then yes, it’s not doing social good unless it’s going to a nonprofit institution dedicated to achieving social good (and who can actually achieve it).

I’ve seen the family offices of wealthy individuals literally split down the middle because of this belief. They have the side of the family office that makes money and the side that gives it away and the two shall never meet. The ways they are making money might be antithetical or detrimental to their philanthropic goals, and their philanthropic goals might even be at odds with the ways they are making money.

I would argue this has been the traditional view of the relationship of philanthropy to business for much of its history. This stems from early protestant beliefs that making money was somehow bad and that giving it away was how you redeemed the fact that you made it in the first place.

It seems that Mark Zuckerberg and his wife Priscilla Chan have a broader, more holistic view. They see opportunities where business might be the right vehicle for promoting and scaling social change and others where grants to nonprofits is the right answer.

They are foregoing restricting themselves to certain means in favor of (hopefully) focusing on ends. That’s something I wish more philanthropists did.

There are different reporting requirements for privately held LLCs and 501(c)(3)s. Nonprofits are by design part of the public trust and therefore are required to report information that LLCs are not. However, as I shared in my last post, the information they are required to report actually doesn’t tell us what we want to know. It doesn’t tell us what the organization’s impact is. It doesn’t tell us whether a nonprofit is worthy of receiving our resources or not.

So yes, privately held LLCs are not as transparent as foundations or nonprofits. That’s absolutely true. But the transparency we currently have from philanthropic entities isn’t great either.

It appears that maybe Zuckerberg and Chan are focused on the right thing (social change. And that they are willing to use their resources in whatever way makes the most sense to maximize social change. They are foregoing restriction, by not placing their funds into a public trust entity like a foundation, in order to have the flexibility to send their resources where they will do the most good.

I certainly can’t know their true motivations, but if there is a “scandal” in this story it should arise if their resources fail to achieve social change, not because they’re parking their assets in an LLC instead of a 501(c)(3).

What do you think of the new Zuckerberg and Chan LLC? Does the legal structure of a philanthropic organization matter? Chime in below with a comment. You can also connect with Andrew Means on Twitter or LinkedIn

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