Philanthropy Basics
In the United States, the term “philanthropy” is used to describe the granting of money to nonprofit organizations by foundations and corporations. This type of giving is often referred to as organized philanthropy or grantmaking.
What is a foundation?
A foundation is a nonprofit organization that supports charitable activities in order to serve the common good. Foundations are often created with endowments - money given by individuals, families or corporations. They generally make grants or operate programs with the income earned from investing the endowments.
For information on the Life Cycle of a Private Foundation click here: http://www.irs.gov/charities/charitable/article/0,,id=127912,00.html
What limits are there on foundation grantmaking?
- Some foundations have broad discretion regarding the charitable causes to which their grants can be directed. Others are sharply limited-often legally-by the mandate of the foundation donor.
- Some foundations are restricted to making grants only to specific causes; others must restrict their grantmaking to a specific geographic area.
How are foundations regulated?
Private foundations are governed by stricter regulations than public charities, which generally raise money from the public to operate institutions or programs. Both foundations and public charities might use the term “foundation” in their titles, but very different laws apply to each. The IRS requires that private foundations:
- Pay out at least 5 percent of the year-end fair market value of their assets.
- Pay an excise tax of 1 or 2 percent on their earnings.
- Give money only to other 501(c)(3) organizations, with a few rare exceptions.
- Nearly all community/public foundations are considered public charities by the IRS. As such, they are not subject to the same regulatory provisions as independent and corporate foundations.
There are four basic types of grantmaking foundations:
Independent Foundations
Independent foundations are the most common type of private foundation. They are generally founded by an individual, a family or a group of individuals. They may be operated by the donor or members of the donor’s family - a type often referred to as a family foundation - or by an independent board.
Corporate Foundations*
A corporate (company-sponsored) foundation is a private foundation that derives its grantmaking funds primarily from the contributions of a profit-making business. The company-sponsored foundation often maintains close ties with the donor company, but it is a separate, legal organization, sometimes with its own endowment, and is subject to the same rules and regulations as other private foundations.
*Corporate Direct Giving Programs
Corporate Direct giving programs are not separately incorporated and do not adhere to private foundation laws or regulations or file a Form 990-PF. They enable the corporation to deduct up to ten percent of its pre-tax income for direct charitable contributions (this includes giving to the company’s foundation.) The average percentage is closer to one percent. They make various other kinds of donations, sometimes treated as business expenses, which are not necessarily included in giving statistics. They are often used as a supplement by the company to support programs that do not fall under the guidelines of the company-sponsored foundation. They do not have an endowment and they frequently include employee matching gifts and in-kind gifts as part of their grantmaking activities.
Community Foundations
A community foundation is a tax-exempt, nonprofit, autonomous, publicly supported, philanthropic institution composed primarily of permanent funds established by many donors for the long-term charitable benefit of the residents of a defined geographic area. Typically, a community foundation serves an area no larger than a state. Community foundations provide an array of services to donors who wish to establish endowed funds without incurring the administrative and legal costs of starting independent foundations. A similar type of foundation is the public foundation, which may provide direct charitable services to the public as other nonprofits do, but their primary focus is on grantmaking.
Operating Foundations
There is also a type of foundation that does not generally make grants, called an operating foundation. The majority of an operating foundation’s funds are expended to operate its own charitable programs.