Is Zuckerberg's philanthropy just shifting funds from one pocket to another?

QUICK PILL

• Technically speaking, their \"charity\" is a Limited Liability Company (LLC)
• 
  An LLC works like a corporation and not a non-profit, so it is free from publicly disclosing all tax documents
• 
  Zuckerberg defended his move to opt for an LLC and not a traditional charitable trust.

Facebook CEO Mark Zuckerberg and his wife Dr Priscilla Chan's pledge to give away most of their Facebook fortune "during our lives" has consistently kept them in the news.

They are setting up the Chan Zuckerberg Initiative, for which they have pledged $45 billion or the current value of 99% Facebook stock they own, to philanthropic activities.

"Our initial areas of focus will be personalized learning, curing disease, connecting people, and building strong communities," revealed Zuckerberg in a letter he wrote to his daughter, where he also introduced the project.

Charity or LLC?

Enough angst is created surrounding the initiative, with speculations rife about whether this should really be called an act of "charity".

Read more: Mark Zuckerberg and wife Priscilla Chan give their daughter the cutest name ever!

Technically speaking, their "charity" is a Limited Liability Company (LLC), "which means it can make for-profit investments, while an actual charity is legally structured to be strictly non-profits", reports The Week.

The New York Times starts right away with "Mark Zuckerberg did not donate $45 billion to charity. You may have heard that, but that was wrong."

Zuckerberg has created an LLC, which more or less indicates that the money merely moved from one pocket to the other.

How does an LLC work?

A Limited Liability Company can invest in for-profit organisations and can also make political donations, for instance, towards education and health. When such companies invest in these areas, they have the power to lobby for changes in law. Which in turn means that Zuckerberg remains free to spend that money wherever and in whatever manner he deems fit. Hence, calling it "charity" shouldn't be the point.

"What's more, a charitable foundation is subject to rules. It has to allocate a certain percentage of its assets every year. The new Zuckerberg LLC won't be subject to those rules and won't have any transparency requirements", says The New York Times.

Also read: Mark Zuckerberg's letter to his daughter is the only thing you need to read

An LLC works like a corporation and not a non-profit, so it is free from publicly disclosing all tax documents and can disburse any profits made from investments.

Tax implications

The international media gleefully reported the news of Zuckerberg's philanthropic initiative, but they left out the societal and tax implications of this move.

In case an LLC sells stock, Zuckerberg will have to pay a hefty capital gains tax, especially if Facebook's stock keeps going up.

However, if it donates towards charity, Zuckerberg will get a deduction just like everybody else.

Read more: The Zuckerbergs will give away 99% of their Facebook fortune. We 'Like' this

In a Facebook post, Zuckerberg defended his move to opt for an LLC and not a traditional charitable trust.

Opting for an LLC, "enables us to pursue our mission by funding non-profit organizations, making private investments and participating in policy debates -- in each case with the goal of generating a positive impact in areas of great need. Any net profits from investments will also be used to advance this mission."

"By using an LLC instead of a traditional foundation, we receive no tax benefit from transferring our shares to the Chan Zuckerberg Initiative, but we gain flexibility to execute our mission more effectively. In fact, if we transferred our shares to a traditional foundation, then we would have received an immediate tax benefit, but by using an LLC we do not. And just like everyone else, we will pay capital gains taxes when our shares are sold by the LLC."

Read full copy of his post here;

The Zuckerbergs also posted a video on donating 99% of their Facebook shares. Watch video:

Zuckerberg can't be criticised for these laws as he did not create them. But he has a huge fortune, has created a foundation and is most likely not to pay any tax on it.

Many critics also argue that he should have shared a greater tax burden rather than pursuing philanthropic causes.

But of course, Zuckerberg hasn't begun to donate yet. We'll have to wait and watch what he actually does with his money.