The Basics of Foundations
There are many different types of non-profit organizations in the marketplace today, and most of them seem very similar to the casual observer.
However, governments distinguish among these various types of organizations for legal and taxing purposes, so it is important to know exactly which type of organization a particular non-profit is. One of the options is a foundation, which is a legal entity for charitable or philanthropic purposes. Most foundations control less than one million dollars in funds, though the Bill & Melinda Gates Foundation (the largest foundation in the United States) controls over thirty-eight billion dollars in assets.
Unlike a business enterprise or other non-profit, foundations are not run by shareholders. In general, foundations do not raise money from the general public or a government. Instead they are normally founded by a particular individual or group of individuals using an endowment, which is a large monetary contribution. The foundation then invests this endowment and funds their activities with the proceeds of the investments. Foundations do not have complete freedom with these funds, but they must follow the dictates of the founder or their articles of institution (the legal forms used to start the foundation).
This restriction is also true for foundations established by other legal entities. For instance, some of the more common users of foundations are educational institutions such as colleges or universities. The foundation allows the institution to give charitable giving credit to its donors, but the foundation is restricted to using those funds only for educational purposes. In many cases, the majority of scholarships and research grants at institutes of higher education are funded by foundations. Even some professorial positions are technically salaried by foundations in the form of “endowed chairs.”
Foundations are also often used to funnel funds to other charities. Sometimes foundations are even legally required to give funds only to other non-profit entities, but this restriction varies from country to country. In particular, many religious foundations are required by their charter to give funds only to other religious foundations that share common beliefs. Foundations are legally exempt from normal discrimination laws as long as they comply with the articles of their founding.
However, it is important to note that “foundation” is not necessarily a legal term, so many enterprises use the word “foundation” in their name even though they are not technically a legal foundation. Sometimes grant-making public institutions are also called foundations, but legally they have few restrictions and more tax benefits than a true private foundation. Some organizations claim to be foundations, but one does not receive tax-deductible giving credit for donating funds to them. Make sure to check carefully before becoming involved with a foundation to ensure that they are complying with all the legal and tax responsibilities required in your region.