Assessing Mark Zuckerberg's Non-Charity Charity

On Tuesday, Mark Zuckerberg announced not one, but two big life events. The first was the birth of Max, his daughter. The second was that he and his wife, Priscilla Chan, are establishing a new organization in the baby’s honor. “Like all parents, we want you to grow up in a world better than ours today,” Zuckerberg wrote in a note to Max on Facebook.

Making the world a better place is something that pretty much all humans can agree on, but backlash against the plan was swift. As journalists, thinkers, and analysts have opined about the Chan Zuckerberg Initiative, their largest criticisms of it stem from two things: the structure of the organization and the way it is being funded. In general, some concerns from early skeptics seem overwrought, or at least premature: Because of how Zuckerberg and Chan have gone about setting up their program, its fundamental goodness (or lack thereof) is entirely in their hands.

The capital used to fund and run the initiative will come from the gifting of nearly all of Zuckerberg’s Facebook stock, worth an estimated $45 billion—the bulk of his net worth. By funneling this stock into a new organization, critics say he’s trying to make tax evasion look like altruism. If Zuckerberg were to sell his stock at some point, he would have to pay capital gains tax on it, not to mention the taxes that would kick in should the money be passed down—and putting this stock into a new organization allows him to move the stock around without actually paying taxes on it.

Fair enough. But some claims about how much Zuckerberg stands to gain from this move in the near term are a bit dubious. Zuckerberg wasn’t selling the bulk of his stock immediately anyway. Also, because the Chan Zuckerberg Initiative has been structured as an LLC rather than a nonprofit, founding the organization won’t give Zuckerberg the charitable deductions that tend to come with charitable donations. The real question, then, is what will happen with the stock after it is transferred to the organization—it could be sold, or donated again. The Chan Zuckerberg Initiative could choose to simply gift the stock to charities, or donate to them with actual money. Those choices, and whether or not Zuckerberg seeks tax exemption, determine whether tax payments, deductions, and disclosure requirements will be triggered.

In general, the Chan Zuckerberg Initiative will be able to operate with much more privacy than a more traditional nonprofit organization. And that too gives some critics pause. “I think one of the big issues around this is the transparency of it, and how we’re really going to know that Mark Zuckerberg and other people that create LLCs are carrying out their charity,” says Brad Smith, the president of the Foundation Center, an organization that provides data and analysis on philanthropy. “Unless they choose to publicly disclose it on websites, or in this case a Facebook page, we’re going to have to rely on their voluntary disclosure to fully understand what they’re doing with that money.”

Zuckerberg’s announcement note left a general hint about how the organization’s money would be spent. “We must participate in policy and advocacy to shape debates,” he wrote. While traditional nonprofits can’t use money to support political campaigns, they can use it for limited policy advocacy. But by funneling their stock into an LLC, Zuckerberg and Chan provide themselves with fewer limits in terms of politics, and just about everything else. In addition to keeping political options open, the use of an LLC means that the Chan Zuckerberg Initiative can use its money for for-profit activities too, including making investments to grow the pot. (Bloomberg provides a more in-depth look at the benefits of creating an LLC versus a more traditional nonprofit.)

All this flexibility will determine the strength or weakness of the endeavor. The mission of the initiative has been criticized as vague, and it’s true that “advancing human potential,” is a much more nebulous endeavor than, say, eradicating malaria. But for the new crop of billionaires who have made their money quickly and through entrepreneurial ventures, the ability to decide how and where their fortunes are spent is key. And for some that means bypassing requirements—among them, taxes—that may divert their funds into causes they don’t believe in.

The ability of the Chan Zuckerberg Initiative to essentially do what it wants without traditional oversight is a central aspect of using private money for public good. “The idea for a long time has been that if the donor gets a tax deduction there should be something in return. So the idea is that once that gift is made, it’s now in the public domain,” says Suzanne Friday, the vice president of legal affairs for the Council on Foundations. “If the donor isn’t getting that benefit, is it fair to require them to be public about it?" By acting outside of a traditional nonprofit, Chan and Zuckerberg also have the ability to tweak the size of the organization’s donations, its charitable strategy, and its mission at will, rather than making a more long-term and permanent commitment to any single organization or solution.

The initiative hasn’t done much of anything yet, so there’s little to judge Zuckerberg on (other than the spotty performance of his past charitable choices). This new initiative could be one of the greatest charitable endeavors of this era, and it could also be a total bust. The fact that it’s an LLC doesn’t dictate the outcome; whom it hires, the priorities it makes, and the strategies it deploys, will.