• December 2019
    M T W T F S S
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Why does the Chan Zuckerberg initiative not have to pay cap gains even though it’s a for profit LLC?

If the Initiative sells any appreciated stock, then it will have to pay capital gains.

Here’s a some additional information to help you understand the broader scope of what’s involved here, based on what we know:

Tax deductions for charitable contributions are deductible only when the donations are made to a nonprofit. The Chan Zuckerberg Initiative is a for-profit entity. Therefore, Zuckerberg would not be entitled to receive a tax deduction on his donation of Facebook shares to the LLC since the LLC is a for-profit entity, not a nonprofit. Hence, no tax deduction for him on this front.

Had the LLC been established as a traditional nonprofit, then he would’ve been able to claim a deduction, but this is not the case since the Initiative is a for-profit company.

However, if the LLC sells any of the stock at a profit, then the members would pay capital gains. This is because LLCs are pass-through entities where the company’s profits pass through the organization and the individual owners are responsible for paying taxes proportionate to their percentage of ownership. In other words, an LLC avoids the double taxation structure that a C-corp is subject to.

Similarly, if the Initiative generates any income outside of selling the stock, then its members will be required to pay tax on it. If the stock appreciates, then the LLC can defer that tax until they sell the shares. Again, if they sell appreciated shares, then they will pay cap gains.

If the Initiative donates any of the stock to a qualified non-profit, then they can deduct the full value of the shares to offset other taxable income. Additionally, they would owe no tax on on the stock’s gains.

As an additional note, in recent years a new for-profit corporate species has emerged: the benefit corporation. Whereas traditional corporations are obligated to focus on enhancing profits, the benefit corporation is a for-profit entity that is legally permitted to commit to promoting environmental and social causes, while still maintaining a for-profit motive.

If you have any additional questions about how to structure a for-profit entity that can work for the overall social and environmental good while retaining a traditional profit motive, please feel free to check out LawTrades. You can also PM me directly if I can help answer any further questions you have about LLCs or benefit corporations.