The Chan Zuckerberg Initiative LLC: Why Not a Benefit Corporation?
The media buzzed last week with the announcement that Facebook founder Mark Zuckerberg and his wife, Priscilla Chan, intended to transfer 99% of their Facebook stock to the newly-organized Chan Zuckerberg Initiative, a company designed to address prevailing social issues. Specifically, many have asked why the couple chose a business entity structure (the limited liability company, or LLC) generally reserved for small family-owned companies.
In a public Facebook post, Zuckerberg claimed the LLC structure will allow the Initiative to pursue both a profit and its socially beneficial goals. Fair enough. Non-profit corporations and charitable trusts certainly have numerous restrictions on how they operate and what can be done with profits.
Except, what about the Benefit Corporation?
Isn’t the Zuckerberg scenario precisely what the Benefit Corporation was made for:
- A for-profit business entity
- With a social-benefit requirement written into its corporate charter
Isn’t this the best of both worlds? Corporate tax benefits and the pursuit of the greater social good?
If we assume that the Zuckerbergs considered the Benefit Corporation (they organized CZI in Delaware, which allows Benefit Corps), then this raises a fair question: what are the differences between an LLC and a Benefit Corporation? And also: which is the better choice for future philanthropists?
Just What is a Benefit Corporation?
A Benefit Corporation is a very recent entity structure. The first state to allow BCs was Vermont, in 2010. Since then, 29 other states have followed suit.
While the regulations and requirements of BCs vary from state to state, the main thrust is this: a Benefit Corporation is a for-profit corporation formed with the twin goals of making a profit for shareholders and benefiting society.
Though it may be hard to believe, C-Corporation don’t actually have any legal requirement to benefit the world. In fact, since C-Corporations do have a legal requirement to maximize shareholder profits, certain decisions which might benefit society but lower profits are, strictly speaking, incompatible with the corporate charter.
By creating the legal framework for BCs, states have acknowledged that a business may be driven by more than the profit margin.
Benefits of the BC
The benefits of a BC are fairly straightforward. A BC is a for-profit company, with all of the liability protections, fundraising capabilities, and tax benefits of a C-Corporation. The main difference is that a BC can pursue socially beneficial investments, products and undertakings, even if doing so doesn’t maximize profits.
A BC is allowed to define “social benefit” with great latitude. Simply donating a percentage of profits to charity can be considered a “social benefit.”
In recent decades, consumers have come to expect businesses to engage in ethical behavior, minimize their environmental impact, and give back to their communities. Companies that embrace the BC model, such as Warby Parker and Chegg (even if they are not, precisely, BCs), often report high levels of customer satisfaction and engagement.
So Why Not the BC?
But if Benefit Corporations are the bees knees of modern ethical business, then why did the Zuckerbergs choose to form an LLC instead? How does a BC differ from an LLC?
It is important to note the original impetus for the LLC structure: to provide small business owners with the liability protection of a corporation, without the corporate formalities and administrative baggage. An LLC is a legitimate entity separate from its owners, same as a corporation, but it doesn’t have a corporation’s Board of Directors, annual shareholder meetings, or federal reporting requirements.
An LLC is also a simpler tax entity. All profits flow directly through the company to its owners (called members), and the taxes are accounted for on personal income tax returns. The IRS doesn’t even recognize the LLC; it treats it as a partnership, and members as partners.
It is likely the lack of formal requirements—and the control this lack allows—that attracted the Zuckerbergs.
A BC is, after all, a corporation. It is required to have Directors and Corporate Officers. It must publish an annual shareholders report, as well as an annual Benefit Report to be evaluated against a third-party standard. A BC must demonstrate its social benefit. It cannot merely assume that some benefit is being gained.
It is telling that the Zuckerbergs, comfortable with the corporate structure and bureaucracy of Facebook, chose to avoid it entirely when it came to their charitable organization. Assuming the Zuckerbergs are the controlling members of CZI LLC, every business decision lies strictly under their control. As a private entity, they are under no obligation to be transparent about where and how they invest their money. And losses, should they come, do not have to be answered for.
In other words, an LLC offers the Zuckerbergs free reign to implement their social vision without the restraints that a corporation—even a BC—would impose on them.
Is This the Future?
Mark Zuckerberg joins Bill Gates and Warren Buffet as the latest billionaire to give away the vast majority of his fortune for charitable ends. But Buffet and Gates utilized more traditional entity structures (the Bill and Melinda Gates Foundation, for example, is a non-profit corporation).
It’s uncertain if Zuckerberg’s approach—the LLC—will be an outlier or the wave of the future. Perhaps the choice speaks to the Zuckerbergs’ particular management style. Or perhaps it is the mark of the younger generation of business leaders (Zuckerberg is 31) and their dissatisfaction with the corporate structure.
Time will tell.