What are the different types of charitable foundations?

The term “foundation” does not have a universal definition and it oftentimes has a different meaning depending on the situation and context. At its core, a foundation is most commonly understood as a type of nonprofit organization dedicated to advancing philanthropic goals. Whether through grant-making, managing charitable programs, or supporting community initiatives, foundations play a pivotal role in shaping the nonprofit sector and driving societal progress.

In this article, we explore the diverse structures and types of charitable foundations, shedding light on their unique characteristics, governance models, and contributions to the public good.

What is a private foundation?

A private foundation is a 501(c)(3) charitable organization established to facilitate philanthropic giving. To receive special tax status from the IRS, a private foundation’s governing documents must clearly demonstrate its dedication to a charitable mission and compliance with specific federal and state requirements.

Unlike public charities, private foundations typically do not operate their own charitable programs. Instead, they primarily provide financial grants to operating charities, such as the American Red Cross or Habitat for Humanity. While private foundations have the option to conduct their own direct charitable activities, this is relatively uncommon.

Private foundations also differ from public charities in their funding sources. They rarely depend on public contributions and are most often funded by private individuals, families, or business enterprises. The founders, who usually contribute substantial initial funding to establish an endowment, maintain significant control over the foundation’s operations and decision-making.

Charitable foundations can be structured as either a trust or a corporation, each offering distinct governance mechanisms and legal implications. A trust-based foundation is governed by a trustee or a board of trustees, operating under a legal arrangement in which the trustees manage the foundation's assets on behalf of its beneficiaries—in this case, the charitable causes it supports. These foundations are subject to the trust laws of the state where they are established, requiring strict adherence to the charitable purposes outlined in the trust deed.

A corporation-based foundation, governed by a board of directors, also operates as a separate legal entity from its founders. State corporate laws oversee the formation and operation of these foundations, outlining requirements for incorporation, drafting articles of incorporation, and adopting bylaws. The bylaws act as a governance blueprint, defining key processes such as electing directors, managing finances, and ensuring compliance with federal and state regulations.

Regardless of structure, both types of foundations must ensure their activities serve the public interest and comply with IRS regulations to maintain tax-exempt status. The choice between a trust and a corporate structure significantly impacts the foundation's management and its operational flexibility—critical considerations for those establishing the foundation.

Private foundations do offer limited financial benefits to their founders, including tax deductions for donations. However, the primary motivation for creating a private foundation is often a strong commitment to philanthropy. All private foundations are further classified as either operating foundations, which directly manage charitable programs, or non-operating foundations, which primarily provide grants to other organizations.

What is an operating foundation?

Operating foundations are a distinctive and relatively rare type of organization in the philanthropic landscape. Unlike traditional grant-making foundations that provide financial support to external organizations, operating foundations focus on directly managing their own charitable programs. This hands-on approach allows them to shape and implement initiatives that closely align with their mission, often in ways that grant-making foundations cannot.

Operating foundations are structured to run programs that demand significant resources, expertise, and operational involvement. This makes them particularly well-suited for entities such as museums, zoos, research centers, and libraries. These organizations benefit from the stability, focus, and continuity that an operating foundation provides, especially when backed by an endowment or a consistent revenue stream.

A prominent example is The Getty Foundation, which manages the charitable programs of the J. Paul Getty Trust. Its initiatives include the operation of the Getty Center and Getty Villa in Los Angeles, world-renowned institutions that house extensive art collections, exhibitions, and research libraries. In addition to managing these physical spaces, The Getty Foundation leads global initiatives in art conservation and education, demonstrating the expansive impact an operating foundation can have on its field.

Operating foundations must meet specific IRS requirements to maintain their status. The main requirement is the Income Test, which mandates that at least 85% of the foundation's adjusted net income is spent directly on its charitable activities. Additionally, the foundation must pass one of three supplemental tests:

• Assets Test: Devoting most assets to its mission.
• Endowment Test: Spending a significant portion of investment returns on activities.
• Support Test: Receiving substantial public or governmental support.

Operating foundations, like other private foundations, are typically subject to a 1.39% excise tax on net investment income. However, they may qualify for an exemption by meeting the Public Support Test, which requires significant funding from public or governmental sources. Passing this test allows an operating foundation to avoid paying the excise tax on its net investment income.

What is a non-operating foundation?

Non-operating foundations, often referred to as "traditional private foundations," are the most common type of foundation in the philanthropic landscape. The term "non-operating" indicates that these foundations are not structured to run their own charitable programs. Instead, their primary purpose is to fund public charities and other philanthropic causes through financial grants.

While non-operating foundations can engage in direct charitable projects, these activities are generally limited in scope, as this legal structure is not designed for operating programs directly. For example, the Gates Foundation, a prominent non-operating foundation, primarily awards grants to other organizations but also undertakes substantial direct initiatives, such as managing global health programs. This mix of grant-making and direct efforts is permitted under IRS rules, provided the foundation complies with regulations governing private foundations.

From a tax perspective, non-operating foundations are exempt from standard federal income tax but must pay an excise tax of 1.39% on net investment income. They are also required to distribute approximately 5% of their net assets annually for charitable purposes, ensuring they contribute to philanthropy rather than merely accumulating wealth.

Non-operating foundations can take various forms, such as independent, family, or corporate foundations. While these classifications differ in governance and funding sources, they all operate under the same IRS regulatory framework.

What is an independent foundation?

An independent foundation is a type of private foundation that operates autonomously, free from the influence of the original benefactor, their family, or a corporate entity. Unlike family or corporate foundations, independent foundations are typically governed by a diverse board of trustees who oversee their operations and ensure alignment with the foundation’s mission. These foundations are usually established with a single endowment from an individual philanthropist or a group sharing a common purpose. This financial independence allows them to focus on making charitable contributions without relying on continuous fundraising efforts.

For example, the Ford Foundation is a prominent independent foundation. Although it was initially founded by Edsel Ford and his father, Henry Ford, the foundation is no longer controlled by the Ford family or the Ford Motor Company. Over the years, it diversified its governance and funding structures to maintain its independence. Today, the Ford Foundation is governed by a board of trustees composed of professionals from various fields, enabling it to operate autonomously and advance initiatives such as social justice, economic equity, and human rights on a global scale.

What is a family foundation?

A family foundation is a type of private foundation that is funded and governed by members of a specific family, often reflecting the philanthropic vision and values of the donor or founding family. These foundations are sometimes referred to as "private family foundations" to underscore their funding sources, which typically come from private, non-public assets.

Governance of a family foundation is usually entrusted to family members, who often serve on the board of directors and play an active role in overseeing the foundation’s management, decision-making, and grant-making activities. While family members may occasionally be employed by the foundation, it is more common for them to serve voluntarily, contributing their time and expertise without financial compensation.

Family foundations are unique in their ability to carry forward a family’s charitable mission across generations. Leadership and control often transition smoothly from one generation to the next, allowing the family’s philanthropic legacy to endure over time. This structure provides continuity and flexibility, enabling the foundation to adapt its initiatives while remaining true to the family’s core values and charitable goals.

What is a corporate foundation?

A corporate foundation is a type of private foundation created and funded by a parent corporation to carry out the company’s philanthropic initiatives. While legally distinct from the corporation, these foundations often maintain a strong connection to their corporate benefactor through shared leadership and strategic alignment.

Corporate foundations are typically governed by boards of directors that include corporate executives and employees, ensuring that the foundation’s activities reflect the corporation’s values and complement its business goals. Funding for these foundations usually comes from the corporation’s profits, which can allow them to build substantial endowments and sustain long-term charitable programs.

The philanthropic efforts of corporate foundations often focus on causes that resonate with the company’s mission or enhance its public image. Whether supporting community development, education, environmental sustainability, or other strategic objectives, these foundations frequently blend philanthropy with brand development, reinforcing the corporation’s commitment to social responsibility while contributing to its broader goals.

What is a community foundation?

A community foundation is a type of public charity rather than a traditional private foundation. Unlike private foundations, which typically receive funding from a single source or family, community foundations derive their support from a broad public base, including contributions from individuals, corporations, and even private foundations. These contributions are pooled into an endowment or other funding structures that allow the foundation to make grants and support community initiatives over time.

As the name suggests, community foundations focus their efforts on a specific locality or region. They often engage directly in charitable activities and also channel grants to other nonprofits operating in their area. One distinguishing feature of community foundations is their ability to manage donor-advised funds (DAFs). These are philanthropic accounts sponsored by donors but maintained and administered by the foundation. Donors receive immediate tax benefits upon making contributions, while retaining the ability to recommend specific grants over time. While community foundations generally honor these recommendations, they retain ultimate authority over the funds to ensure compliance with IRS regulations and the foundation's mission.

Community foundations often prioritize projects that address local needs, such as funding scholarships, healthcare initiatives, or community development programs. This targeted focus allows donors to see the direct impact of their contributions, making community foundations a valuable partner for localized philanthropy.

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