LLCs – Good apples from a rotten tree

Despite the apparent willingness of some limited liability company (LLC) owners to embrace openness, the model is flawed

In 2015, Mark Zuckerberg, chief executive of Facebook, and his partner, Priscilla Chan, announced their intention to give away 99 per cent of their shares in Facebook – then worth some $45 billion – to the newly created Chan Zuckerberg Initiative. Media accounts celebrated the couple’s commitment as ‘one of the world’s largest philanthropic gifts’. But the Chan Zuckerberg Initiative (CZI) was not a traditional grantmaking foundation or a tax-exempt charity in any form. Instead, the couple’s philanthropic initiative was an LLC, one of the most common legal forms among for-profit businesses but, until recently, a rarity in philanthropy.

Rare but not unique. Both Pierre Omidyar, and his wife, Pam Omidyar (the Omidyar Network) and Laurene Powell Jobs (the Emerson Collective) founded philanthropic LLCs in 2004. The Omidyar Network combined an LLC with a private foundation to make both charitable contributions and impact investments. Powell Jobs opted for the LLC form with the aim of funding entrepreneurs who ‘can find solutions that might not occur to a non-profit’. When these organisations make grants to college mentoring or violence prevention programmes, they resemble traditional 501(c)(3) foundations. But when they buy a 20 per cent stake in the Washington Wizards or lead an investment round in supersonic jets – both of which Powell Jobs did between 2017 and 2019 – they make a clear break from the familiar philanthropic mould.

The Omidyar Network, founded by Pierre and Pam Omidyar, combined an LLC with a private foundation. Credit: Wikimedia Commons/2.0 Generic

One-stop shop for philanthropic ambition

Maybe that’s the appeal. The growing interest in philanthropic LLCs, especially among the uber-wealthy tech elite, reflects both criticism of the traditional modes of philanthropic largesse and an interest in approaching philanthropy in the entrepreneurial way they’ve approached their business endeavours. To the founders of CZI, Omidyar, Emerson, and others, traditional philanthropy is ill-equipped for meaningful social impact. Maintaining the status quo, they argue, may do more to perpetuate social problems than it does to identify workable solutions.

Laurene Powell Jobs – supporting entrepreneurs. Credit: Wikimedia Commons/4.0 Internationa

In breaking with older philanthropic vehicles – and the laws and regulations that bind their actions – LLCs offer donors considerable freedom to give money to who they want, when they want, and how they want. LLCs can make unlimited investments in for-profits, engage in unlimited political lobbying, and provide funds in support of political campaigns, all things that traditional 501(c)(3) foundations are prohibited from doing. Neither are LLCs subject to any spending requirements and while there’s no immediate tax benefit to forming an LLC (as there is with a foundation or donor advised fund), founders are free to claim deductions from whatever charitable contributions they make through their LLC. Foundations face steep penalties for transacting with founders’ other business interests. LLCs on the other hand can (and do) have cozy relationships with such entities. And unlike foundations, LLCs are readily dissolved. Founders can call it quits on their philanthropic endeavours and retrieve their assets without legal repercussions.

In short, the LLC is a one-stop shop for philanthropic ambitions, allowing founders to seamlessly shift between strategies and goals ranging from traditional charities to impact investing to political advocacy. As Pierre Omidyar told the Chronicle of Philanthropy in 2011: ‘If you’re trying to make the world a better place, doing so by only focusing on tools in the non-profit sector is like operating with one hand tied behind your back.’

Flouting the Grand Bargain

But maybe there are good reasons for that hand to be tied.

In casting off the fetters of traditional philanthropy, the mega-rich have also violated what legal scholars Brakman Reiser and Dean call the Grand Bargain – the idea that philanthropists will not assert influence over the public sphere without being accountable to the public in equal measure. All the freedoms that LLCs enjoy are at odds with the Grand Bargain ideal as enshrined in the Tax Reform Act of 1969.

Particularly egregious is that LLCs are able to sidestep the transparency requirements that hold foundations to making publicly available annual disclosures detailing where their money came from and where it went. Commenting on Zuckerberg and Chan’s allocation of their Facebook shares, the Tax Justice Network’s Jack Blum argued, ‘what we have is a promise to give money away at some future time in amounts to be disclosed at some future time…Time will tell if the promise is kept but the public may never know.’

Particularly egregious is that LLCs are able to sidestep the transparency requirements that hold foundations to making publicly available annual disclosures detailing where their money came from and where it went.

Nevertheless, some of the most prominent LLCs seem to have taken critiques of their secrecy to heart and have begun opening themselves to greater transparency and accountability. The Omidyar Network, for example, publishes its investments, financial statements, and points of view on its website which even acknowledges that failure to disclose this information ‘goes against our commitment to transparency and true democracy, so we are voluntarily disclosing them here’.

CZI, too, has begun to change its tune. When pressed on the opacity of its education funding, a spokesperson explained that as part of CZI’s ‘commitment to transparency’, the organisation had ‘begun sharing our learnings with the education community and news media’. CZI now also has a searchable funding database, albeit limited only to non-profit recipients and excluding ‘grants that are short-term, discretionary, or exploratory in nature’. And making good on Zuckerberg’s promise that the LLC would ‘engage directly with the people we serve’, CZI has put extensive effort into participatory grantmaking and making decisions based on surveys, review panels and other forms of community input.

Similarly, when John and Laura Arnold decided to bring their foundation under the auspices of an LLC in 2019, they insisted they would continue to ‘hold ourselves to the highest standards of openness and transparency’. The couple has been outspoken on questions of philanthropic accountability. John Arnold is particularly critical of donor advised funds, which, in his view, should be subject to the same 5 per cent payout rule as foundations. And while he believes that freedom from intensive oversight might allow philanthropists to experiment with new solutions to stubborn social problems, he concedes that it’s important for philanthropists to engage with public criticism.

The limits of self-scrutiny

But herein lies the irony: while these LLCs are going above and beyond what is legally required in terms of accountability, they are ultimately helping to legitimise an organisational form that leaves these decisions – questions of whether or how billionaires should be held accountable – in the hands of the billionaires themselves.

Many of these LLCs are concerned with issues of accountability writ large. The Omidyar Network and Arnold Ventures, for example, are active funders in areas of government transparency, citizen empowerment through information, corporate whistleblowing, and accountability for taxpayer dollars. They regard transparency and accountability as necessary for a well-functioning and democratic society. However, by using an LLC to advance these goals – however accountable they may be themselves – they tacitly endorse the idea that philanthropists should be exempt from those same obligations.

Optimistically, the precedents set by leading LLCs might become the standards to which newer philanthropic LLCs hold themselves. Jack Dorsey – who is notoriously taciturn about his philanthropic endeavours – has promised that, with regard to his #StartSmall LLC, ‘all grants will be public’ and hopes ‘this inspires others to do something similar’. While he and similarly-styled disclosers have been celebrated for their largesse, they are also sowing public ambivalence about the forms in which the mega-rich give, focusing attention instead on the mere fact that they give. And while a rising tide of backchannel philanthropic plutocracy might draw suspicion, the very nature of LLC operations helps keep criticisms at bay. It’s hard to get angry about things you can’t see. For what little is dug up about these dark organisations via investigative reporting, it seems likely that the headline-grabbing practices of more open and accountable LLCs will palliate popular concern.

Proponents of LLCs are right that traditional foundations leave much to be desired. Indeed, there are legitimate concerns: they must meet a standard of public accountability through annual disclosures, but these reports – sparse in detail and focused on what foundations have done rather than what they will do next – shine only a dim light on philanthropy. As it stands, traditional 501(c)(3) foundations, despite their freedoms and outsized influence in public life, enjoy little oversight from the public. With LLCs, the public’s ability to assess plutocratic power goes from bad to worse.

For what little is dug up about these dark organisations via investigative reporting, it seems likely that the headline-grabbing practices of more open and accountable LLCs will palliate popular concern.

Public accountability should not be the price of philanthropic innovation. Pledges, social media posts, and voluntarily listed grant databases offer only a simulacrum of accountability, leaving philanthropists with the power to decide what to share or conceal. If philanthropic LLCs value transparency and public participation, as many of them attest, they should use tools that do not merely allow for those goals, but ensure that they are accomplished now and into the future. Traditional philanthropy may be flawed, but today’s philanthropists, eager for innovation, can find a remedy far less rotten than the LLC.

Aaron Horvath is a sociologist and postdoctoral fellow at Stanford University Center on Philanthropy and Civil Society.
Email: ahorvath@stanford.edu
Twitter: @horvathianisms

Micah McElroy is a historian and associate director of research, Effective Philanthropy Learning Initiative at Stanford University Center on Philanthropy and Civil Society.
Email: micah.mcelroy@stanford.edu
Twitter: @_MicahMcElro