Foundations 101: Understanding the world of grantmaking and philanthropy

With continuing governmental budget cuts putting many of our public services at risk, it is more important than ever that nonprofit organizations understand where to find other revenue sources.

In 2006, 12.4 percent or $36.5 billion of total charitable giving in the U.S. came from foundations according to research conducted by the Center on Philanthropy at Indiana University. This segment comprises the largest source behind individuals, which makes up 75.6 percent or $220.89 billion in total charitable giving.

What is the definition of a foundation?

A foundation is a nonprofit corporation or a charitable trust the main purpose of which is to make grants to unrelated organizations, institutions, or individuals for scientific, educational, cultural, religious, or other charitable purposes. There are two types of foundations: private and public.

One common characteristic that separates the two types is that a private foundation receives most of its funds from one source, whether an individual, a family, or a corporation. Alternatively, a requirement of a public foundation is that it receives its assets from multiple sources (which may include private foundations, government agencies, fees for services and individuals from a broad spectrum of its service area).

The determination as to whether a charity is private or public is made by the Internal Revenue Service (IRS). Under the Tax Reform Act of 1969, different rules and regulations apply to those nonprofits found by the IRS to be "private foundations."

Because of their narrow base of support, private foundations are subject to federal laws and regulations intended to assure that they serve the public good. These rules include, among other things, a minimum annual distribution requirement, an excise tax on investment income, limits on the proportion of a for-profit enterprise they may own, and restrictions on grantmaking for certain kinds of recipients and activities.

The Foundation Center, whose mission is to strengthen the nonprofit sector by advancing knowledge about U.S. philanthropy, further breaks down the private foundations category into "independent" and "corporate" based on whether they or their donors are individuals or corporations.

Independent foundations are often called family foundations and are the most common type of private foundation. Established by an individual or family through gifts or bequests, these foundations vary in size, operating style and grantmaking focus.

Well-known examples of family foundations are the Bill and Melinda Gates Foundation, the Rockefeller Foundation and the Carnegie Corporation.

Depending on the size of the foundation, family foundations' giving programs may be based locally, regionally, nationally, and/ or internationally and they may have giving programs based on the local charities and institutions the family is associated with or use more of an issue-driven grant program.

Another type of private foundation, operating foundations receives their support from an individual or a small group of donors. What makes these foundations unique is that most of their accomplishments are by supporting their own programs rather than by making grants.

Corporate foundations, also called company sponsored foundations, generally receive their assets from a publically held company rather than an individual or family. A corporate foundation and the company that established it are separate entities though often the supporting company funds the bulk of the foundation's giving through annual gifts to the foundation.

These types of foundations often focus their grantmaking programs in the communities where their company resides or on activities that will raise awareness of the company in target markets.

Why is it important to know about foundations and philanthropy?

Understanding what foundations are and how or why they were formed will better allow you to understand their motivations for funding certain programs. By understanding their motivations, you can better determine if you would also like to fund the same or similar programming. Many times you are indirectly supporting causes by frequenting certain business. Do you know what your favorites business support philanthropically? Maybe you will want to find out. Next week's topic: public foundations.

The Southwest Florida Community Foundation has been supporting the communities of Lee, Charlotte, Collier, Glades and Hendry through endowed funds for more than 30 years. With assets of more than $57 million and 314 endowed funds, the community foundation has provided more than $30 million in grants and scholarships to the communities it serves.

For more information, please call 274-5900, or visit their web site at www.floridacommunity.com.