The Nonprofit FAQ
| What is a foundation? |
by Putnam Barber, Editor of the Nonprofit FAQ From many points of view, the most important use of the word 'foundation' is as a description for an organization that controls financial assets and uses them to support charitable or philanthropic work. Often such foundations work by making grants to qualifying nonprofit organizations to support specific projects or the work of the recipient — the grantee — in general. A few large foundations of this sort have household names: The Ford Foundation, the Bill and Melinda Gates Foundation, the John M. OIin Foundation, among others. In all, though, there are a very large number of foundations, most of them relatively small. In 2009, using data from the Internal Revenue Service, the National Center for Charitable Statistics reported that there were nearly 120,000 "private founations" in the United States. Foundations of this sort are increasingly found in other nations as well. "Private foundation" is a term used in the U.S. Internal Revenue Code. It refers to a tax-exempt entity (usually a corporation or a trust) that is supported by earnings on invested assets or by regularly receiving a few gifts of substantial size. (The other sort of tax-exempt entity is known as a "public charity" and receives its support in the form of earned income or a relatively large number of relatively small gifts.) "Private foundations" in this technical sense of the term are required to operate in specific ways in order to preserve their tax exempt status and avoid paying extra taxes on their income. Some foundations are closely connected to for-profit corporations; as a group they're called "corporate foundations." Such foundations usually receive a donation from the related corporation's profits each year and work to implement charitable programs in the communities where the corporation operates, education programs related to the corporation's work, and to do other good works. Often the board members of the foundation are senior executives of the corporation that sponsors its work. Another large group of foundations operate quite differently. Known as "community foundations," they focus on a specific, often quite limited, area and receive donations and bequests from people who want a flexible way to focus philanthropy in that place. Because they typically receive larger numbers of relatively small gifts (at least when compared with the support received by "private foundations"), community foundations in the US are usually classified as public charities by the IRS. Community foundations often manage a large number of "donor-advised funds" into which individuals and families make charitable gifts and from which the community foundation draws funds to implement the donors' philanthropic goals. Once funds have been donated in this way, the community foundation maintains expenditure control and (usually) charges a small annual fee for investment and grant-making services. Many observers of philanthropy urge people with the means to consider significant philanthropy to think twice before establishing a private foundation. The expense and complication of creating and maintaining small private foundations compares unfavorably, they say, with the alternative of relying on the services of a community foundation to create and operate a donor-advised fund. There is one other form of foundation that has significant impact. Called "operating foundations", these organizations usually depend almost entirely on endowment income for their work. Instead of making grants to other organizations, operating foundations undertake programs of research, publication, convening and other activities related to their purposes, purposes that usually were specified at the time the foundation was created by a gift or bequest. Among all these different types of foundations, only a few invite proposals from prospective grantees, and those that do usually focus their grantmaking in very specific ways. The rest either operate their own programs to implement their charitable missions or support organizations with which they have established relationships. Foundations that are willing to review proposals usually publish -- on their websites or in other formats -- advice about how to inquire and how to complete an application. Even if a foundation is listed in a directory of grantmakers, it is a good idea to do quite careful research to avoid wasting time pursuing foundation support. One further note — the word "foundation" has no specific legal or financial meaning. There are many organizations with the word foundation in their name that are active in seeking funding from the public and from grantmakers and do not ordinarily make grants or seek partners for operating programs. There is further information about foundations in other parts of the Nonprofit FAQ, at other websites, and in many books and other research materials.
February 8, 2010 -- PB |