Much of the Internet is giddy over Mark Zuckerberg and Priscilla Chan’s “pledge” to give “99%” of their Facebook stock to “charity.” Bill and Melinda Gates said, “The example you’re setting today is an inspiration to us and the world.” Unfortunately, it’s not a very good example.
Since the last gilded age, the super-rich have generally given to charitable organizations or to their own charitable foundations. That’s why we have the University of Chicago, Carnegie Hall, and the Getty Center, to name a few. Today’s new class of gazillionaires has largely followed in their footsteps: Gates created the Bill and Melinda Gates Foundation, Stephen Schwarzman gave $150 million to Yale, John Paulson gave $100 million to Central Park, and so on.
Well, Mark Zuckerberg has found a different way.
Instead, he’s creating an LLC that he owns (the Chan Zuckerberg Initiative), giving his stock to the LLC, and telling us all that the LLC will do wonderful things for the world.
Quick primer: A limited liability company is just a type of business organization, like a partnership or a corporation. It has owners, who control it, either directly or through managers whom they appoint. It can do anything that any other profit-seeking business can do. It doesn’t pay taxes; instead, its profits, losses, or deductions simply get transferred to its owners’ tax returns. Its primary advantage is that it is extremely flexible: you can design an LLC more or less any way you want.
So let’s say Zuckerberg and Chan give 99% of their stock to their LLC. What does that really mean?
First off, “give” is the wrong word to use in this context. That implies that the money is irrevocably going from them to something else.
In this case, they are investing in their own company. Because it’s an LLC, they still have complete control of the money.
That means they can, among other things:
- Write checks from the LLC to themselves as its owners, pay themselves salaries for running the LLC, borrow money from the LLC, borrow money personally using LLC shares as collateral, sell some of their shares in the LLC to other people, or take cash right back out in many other ways.
- Use the LLC to buy houses they live in, offices that they work in, etc..
- Invest in profit-making companies.
- Contribute to political campaigns or super PACs, engage in direct political activity, or lobby legislators.
- Pay for his own political campaigns, if he so chooses.
- Give money to charitable foundations or operating 501(c)(3) nonprofit organizations.
Essentially, Zuckerberg can do everything with the LLC’s money that he can do with his own money. So on the most substantive level, he hasn’t done anything except announce some vague intentions. The “99%” claim made a lot of headlines, but there’s a lot less there than meets the eye. A lot of things that other billionaires do with their own money—like invest in other companies—Zuckerberg can now do with the LLC’s money. The only thing he seems to be saying is that he and his family will restrict their personal consumption to 1% of his fortune (about $450 million), but even that is not entirely clear. He certainly retains the ability to take money back out whenever he wants, and the LLC will almost certainly do some things that really are personal consumption (like political contributions). In addition, whenever the LLC makes a contribution to a real charity, the associated tax deduction will flow back up to Zuckerberg and Chan. So to the extent that they have to sell stock to pay for their consumption, they will never pay tax on those sales. (Put another way, their remaining $450 million, as well as any money they make in the future, is now all after-tax money.)
Is this really so bad, though? I mean, he says he will use the LLC to make the world a better place.
But compare what he’s doing to what past tycoons, up to and including Bill Gates and Warren Buffett, have done. They donated directly to charitable organizations or to charitable foundations. There are a lot of criticisms you can make of the current “charity” system that exists because of the tax deduction for contributions: a lot of recipient organizations do little good for society, some do harm (like the NRA’s 501(c)(3)), and the tax deduction directs money from productive investments to mega-rich institutions like Harvard University. But Gates and his predecessors at least agreed to play by certain rules: not to take the money back if they changed their minds, not to use it to further increase their wealth, not to use it influence the political system (although that rule has some loopholes), and so on. The idea was that if you became a multi-billionaire, you would relinquish some of your control over a large chunk of your wealth and irrevocably dedicate it to attempting to improve society, according to rules that society has agreed on. That’s what the Giving Pledge was all about.
Mark Zuckerberg doesn’t want to play by the rules. He thinks he can do a better job. Maybe he can, although I don’t have any reason to believe that’s true. This is the next step in the privatization of philanthropy. No more Giving Pledge. Instead, we’ll have the Keeping Pledge:
I pledge to keep all of my wealth and use a lot of it to make the world better place, as long as I get to define “a lot” and “better.”
Mark Zuckerberg isn’t the first person to make the Keeping Pledge. The Koch brothers already did: they’ve given away lots of money to charity, but they’re keeping even more to spend on politics, because they believe that that’s the most effective way to make the world a better place (as they see it).
Zuckerberg’s LLC’s investments may end up having as much positive impact on the world as the Gates Foundation’s (although I’m not sure how high a bar that is to begin with). Most likely we’ll never be able to evaluate it in any kind of definitive way. But it is certain to have a different impact in the short term. Other super-rich people will feel no pressure to sign onto the Giving Pledge or donate their money to the traditional charity system. Instead, they will create their own LLCs, maintain complete control over their money, and spend it on their own pet projects and political issues. That’s not a good thing.
Also posted on Medium.
18 thoughts on “Mark Zuckerberg’s $45 Billion Loophole”
In that case it’s not charity but a diversification of interest from one co to another. What the hell these people get advertisement for. The act had been acknowledged world over and I tweeted soliciting Indian industrialists to emulate bill gates n Mark
When It comes to Zuck, I would never expect him to do good things with his wealth. This is the same man who asked why anyone would want privacy, has no remorse in selling even the most private details of his users lives, and lived behind a gated, secured wall while claiming to believe in an open lifestyle.
This is just another spoiled, rich guy scam.
Thanks for writing this helpful revue for anyone with an LLC :-)
I was always in the camp that believed that “charity” would not be needed if there was a real, bona-fide “economy” based on double entry bookkeeping where labor was allowed to own, control, and exclusively enjoy its fruits, and the distribution of their fruits to future generations. In a way, Mark should be thanked for providing prima facie evidence of our so-called “global economy” – that big grand gestures of “charity” that is nothing but another spin of stolen wealth that does not – legally – have to trickle back down to labor. In short, why does “labor” need “charity”?
How much is labor already tax-payer funding “education” and “disease” and “policy” with little or no say over demanding that the billions of tax dollars actually produce “results” that make “charity” a thing of the past?
Instead, the “leadership” of taxes spend millions re-classifying Pluto from a planet to a dwarf planet. Mark has done the same to labor, reclassified salary into charity. Money well spent in his opinion, without actually spending the money into “charity”.
FRB – One big bowl of crazy….
How do you think that volume of funding is supposed to be managed and administered? An LLC makes a ton of sense so they are able to provide assistance with broad lattitude, as well as continue to grow the kitty as funds are disbursed over time. The Gates Foundation may be a different type of entity but works basically the same way – not “direct to charity” in the way you imply. Give it a rest and accept Zuck’s noblesse oblige at face value.
@ The idea was that if you became a multi-billionaire, you would relinquish some of your control over a large chunk of your wealth and irrevocably dedicate it to attempting to improve society, according to rules that society has agreed on. That’s what the Giving Pledge was all about.
The larger question is does the Zuck have a doctorate degree? If so, then in what field, does he know how to use it or is this simply a pipe dream which can not accomplish goals but only promise them as politicians make promises and then pass the losses to the tax payers as the profits are then siphoned to the private sector. The odds of real success are dubious, looking inside his current situation, he to me, has only created giraffe dolls to be passed on to his offspring disguised as doing great things for the future of the world. When in fact, he has only created a pain in the neck to be denied each morning while moving forward with the majority at break neck speed during the rest of the day.
My feeling is it’s a good first step for all wealthy people to transfer their wealth to a limited company, rather than keep it as personal wealth that they can use on a whim.
Inequality has different effects on society depending on how wealth is used: For consumption, investment, charity, or political ends. It’s hard to win an argument for greater equality across the board, but a progressive agenda that focuses on these four areas separately is more likely to succeed. For example billionaires would more readily agree to put a ceiling on their consumption than they would let go of the right to invest in new companies. Society would be able to make moral arguments about each aspect of inequality, for example political capture, that are more focused and likely to yield change.
Zuckerberg’s vehicle may be faulty, but the principle of separating wealth into different legal and accounting entities for each kind of activity is valuable and needs to be pursued. The outcome that we want is to tax consumption, investment, political influence, and charity very differently, so it’s an essential step to separate them.
I think this separation by activity is more important than whether Zuckerberg personally manages his own charity or puts his money into Gates’s.
Same is obviously true of the PR rationalizations for keeping Fiat, issued-as-debt currency $$ completely away from labor:
The ultimate question is – why are they still directing traffic, so to speak, when all around them is carnage from the accident they caused?
Historically, this is the worst priest class to torment the sane with bombs and bullet supported “isms”. Ever. The Shamans of Gizmology…..if there are any adults in the room here, can we get real for a second? A perpetual war between “what is torture when greed is good?” versus youtube beheadings?!
90:1.4 (987.2) But not all shamans were self-deceived; many were shrewd and able tricksters. As the profession developed, a novice was required to serve an apprenticeship of ten years of hardship and self-denial to qualify as a medicine man. The shamans developed a professional mode of dress and affected a mysterious conduct. They frequently employed drugs to induce certain physical states which would impress and mystify the tribesmen. Sleight-of-hand feats were regarded as supernatural by the common folk, and ventriloquism was first used by shrewd priests. Many of the olden shamans unwittingly stumbled onto hypnotism; others induced autohypnosis by prolonged staring at their navels.
90:1.5 (987.3) While many resorted to these tricks and deceptions, their reputation as a class, after all, stood on apparent achievement. When a shaman failed in his undertakings, if he could not advance a plausible alibi, he was either demoted or killed. Thus the honest shamans early perished; only the shrewd actors survived.
Best analysis of shamanism here:
The proof will be in what he does with the LLC, not the corporate structure. An LLC has capabilities for good greater than a foundation or personal giving program.
What gets little attention here is that currently organizations classified as charities are restricted from activities that an LLC and that some of those activities are absolutely vital to society’s best interest. Yes, an LLC can lobby without limit and give to political campaigns without limit but are there not worthy causes and political campaigns facing the wealth and might of the corporate sector today who are limited in what they can do for the values they support?
The test of Zuckerberg’s “wealth transfer” or “gift” is in how he takes advantage of the powers of the LLC for charitable purposes, through any of its capabilities not currently possessed by charities. The skepticism shown here seems to ignore our having no facts to suggest that the LLC’s work will be beneficial. Examples: The Ford and Rockefeller foundations, neither founded by people known to have cared much about the public welfare, have long records of doing good. If they possessed more of the LLC powers, they could do more.
Further, donors often retain control over their foundation’s giving decisions, investments, pay officers and trustees they choose, sometimes family members, etc. There is nothing different about this.
Even if he does spend it “charitably”, what we have is in effect a transfer of will. The will of the people as been transferred to the will of the few. His choices reflect *his* priorities, not necessarily the the people’s.
I’m not saying Zuckerberg is bad, or even that I would disagree with his priorities, I’m just saying it hands the control of what is important from the people to the few rich like him.
MaybeeI don’t understand your comment but nothing he’s doing now represents a change in control. He controls this now and he will control it in the new LLC. No change there. What am I missing about your point “a transfer of will?”
Apologies, that should be “maybe.”
It’s his wealth; it’s his prerogative.
This is probably applicable in this context too.
So he will be the owner of virtually – nothing – if everyone exits FaceSlap at once – easy come, easy go.
And when people see that this is just another Shaman of Gizmology high priest scam – no “trickle down” charity, the exodus will happen.
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