Zuckerberg, Chan $45B pledge is not for charity, but a company

Shortly after Max was born to some of the richest parents in the world, her mom and dad announced their plans to give most of their wealth away.

Facebook CEO Mark Zuckerberg and his wife, Priscilla Chan, celebrated their daughter Max's birth by committing 99 per cent of their Facebook shares — worth about $45 billion US, or the bulk of their $46.8 billion net worth, according to Forbes — to their new venture, the Chan Zuckerberg Initiative.

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The enterprise will initially focus on "personalized learning, curing disease, connecting people and building strong communities," reads a public letter from the new parents to Max.

But the Chan-Zuckerbergs aren't simply handing a multi-billion cheque over to charity. Their venture has a more complicated structure, designed to give the couple more flexibility in how — and if — that money is distributed in what seems to be an emerging trend of for-profit philanthropy.

'Definitely different' than charity

The Chan-Zuckerberg Initiative is an LLC, or limited liability company.

"It's definitely different from a charity," says Gene Takagi, the managing attorney of the San Francisco-based NEO law group, which advises non-profit and tax-exempt organizations. "It's not as transparent. It's not subject to the same kinds of rules."

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The Internal Revenue Service grants charities tax-exempt status so long as they follow certain rules outlined in the Internal Revenue Code.

To qualify, a group's mission has to be deemed charitable, which includes work like "relief of the poor" or "defending human and civil rights secured by law." A charity's earnings can't benefit the creator, his or her family or other private interests.

The IRS also strictly regulates the amount of political activities, such as public statements supporting or opposing a candidate, or lobbying, that a charity can do.

An LLC, on the other hand, is not bound by those same rules.

All this gives Chan and Zuckerberg more flexibility in how the money they put into their initiative can be used, says Melissa Berman, the CEO of Rockefeller Philanthropy Advisers, a non-profit organization that advises and manages more than $200 million in annual donations.

Through their LLC, the couple can not only donate funds to charities, she says, but also invest in companies, and do advocacy or policy work.

Zuckerberg has a history of lobbying. In 2013, for example, he helped form FWD.us, a group that supported "comprehensive immigration reform," according to its site.

The new initiative will include public advocacy work, according to a filing to the U.S. Securities and Exchange Commission.

"They've created a vehicle that gives them multiple channels to help achieve their social goals," says Berman.

Loose financial commitment

For the next three years, Zuckerberg has pledged to "sell or gift no more than $1 billion of Facebook stock each year," according to the filing.

But, while most charities must spend at least five per cent of their assets for charitable work or grants, an LLC is not obligated to use any of its money this way.

The Chan-Zuckerbergs "could give nothing for five years and then give 80 per cent of it in the sixth year," says Takagi. "They're kind of free to do what they want as an LLC."

That includes changing their minds altogether, he says, and, perhaps, using the LLC as a personal investment fund for their new family.

"There's nothing really preventing [them] from doing so."

That's why this type of philanthropy opens people up to more public scrutiny, says Takagi, as it involves more trust than a one-time charitable donation.

"Those funds are forever dedicated to charitable purposes and, from a public perspective, that's much more trustworthy."

The couple has promised to provide more information on their plans in the next few months. In November, they committed to giving away the majority of their wealth as part of the giving pledge, a movement for the world's elite to donate more than half of their wealth over their lifetime or in their will.

'Growing trend' for rich philanthropists

Despite some public skepticism about this type of venture, it's not the first of its kind.

"It's a growing trend," Berman says, of philanthropists with deep pockets creating LLCs for bespoke philanthropy, rather than donating solely through established charities.

EBay founder Pierre Omidyar's Omidyar Network, for example, funds entrepreneurial endeavours that it believes will enhance social good.

A decade ago, Google started Google.org. It's not a charity, but rather a philanthropic initiative that invests "in teams with bold ideas that create lasting global impact," according to its website.

These initiatives, which are increasingly visible, show that there are methods outside of charities for contributing to social good, says Takagi.

While the possibility exists for the Chan-Zuckerbergs to renege on their public promise, it's too soon to know how their venture will play out, says Mark Blumberg, a partner and specialist in in non-profit and charity law at Blumberg Segal LLP, a Toronto-based law firm.

"Of course, the reality is what's going to happen over the next few years, we don't really know."

But it's premature to criticize a couple that — if their intentions are good — has pledged $45 billion to helping others, Takagi says.

"It's their money. It's their own private business," he says. "And they say they're going to do a lot of good things with it."