Foundation (charity)

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1 Foundations in civil law systems
2 Foundations in US law
3 Foundations in English law
4 See also
5 Further reading
6 External links

[edit] Foundations in civil law systems

The term "foundation" originates in civil law jurisdictions, where it is used to describe a distinct legal entity.

A foundation has legal personality, and is entered in a public registry like a company. Unlike a company, it has no shareholders, though it may have voting members. It holds assets in its own name for the purposes set out in its consitutive documents, and its administration and operation is carried out in accordance with contractual rather than fiduciary principles. The foundation has a distinct patrimony independent of its founder.

Foundations are often set up for charitable purposes.

The foundation finds its source in institutions of medieval times when a patron would establish a foundation to endow a monastery or other religious institution in perpetuity.

The States of Jersey are considering introducing civil law type foundations into its law. A consultation paper presenting a general discussion on foundations was brought forth to the Jersey government concerning this possibility: Foundations: Proposals for a new law (pdf file).

[edit] Foundations in US law

A foundation is a type of philanthropic or charitable organization set up by individuals or institutions as a legal entity (a corporation or trust) with the purpose of distributing grants to support causes in line with the goals of the foundation or as a charitable entity that receives grants in order to support a specific activity or activities of charitable purpose. Wikimedia Foundation, Inc., parent organization of Wikipedia, is an example of the latter.

In the United States, the word "foundation" does not have the same legal restrictions as "incorporated" or "limited;" therefore many foundations do not have the word foundation in their name and many organizations that one would not consider to be a foundation include the word foundation in their name. The status of an organization as a private foundation or public charity is determined by federal tax code as interpreted by the Internal Revenue Service.

There are several types of foundations, including family foundations, corporate foundations and community foundations. Community foundations are public charities established in communities throughout the world (there are about 700 in the U.S.) to support community efforts. Frequently, these community foundations have both funds to be used at the discretion of the board of directors and other, specialized funds established by individuals, families, businesses, and nonprofit groups at these foundations into which they contribute a variety of assets (cash and stock being among the most popular). These assets are invested and grow over time. While there are many different kinds of funds that can be established, among the most popular are donor-advised funds. These enable those who established them to contribute assets into the funds at any time, and then they can recommend that grants be made from the fund to qualified nonprofit groups in any amount and at any time in the future--anywhere in the world. Community foundations also work with people to help them implement charitable giving as part of their estate plans--e.g., through a bequest. A charitable foundation is a nonprofit corporation or trust with a principal purpose of making grants to unrelated organizations or institutions or to individuals for scientific, educational, cultural, religious, or other charitable purposes. Most such foundations issue grants from investment proceeds of a permanent endowment, like a university's permanent endowment; a minority of foundations are set up to "spend down" the endowment itself, meaning they cease to exist after a certain number of years of grantmaking.

The two most famous philanthropists of the Gilded Age pioneered the sort of large-scale private philanthropy of which permanent charitable foundations are a modern pillar: John D. Rockefeller and Andrew Carnegie. The businessmen each accumulated private wealth at a scale previously unknown outside of royalty, and each in their later years decided to give much of it away. Carnegie gave away the bulk of his fortune in the form of one-time gifts to build libraries and museums. Rockefeller followed suit (notably building the University of Chicago), but then gave nearly half of his fortune to create the Rockefeller Foundation. By far the largest private permanent endowment for charitable giving created to that time, the Rockefeller Foundation was the first to became a widely-understood example of the species: a standing charitable grant-making entity outside of direct control by any level of government.

While several types of foundations exist, the two most common are private foundations and community foundations. Both are independent non-profit corporations governed by a board of directors, and both types make grants from a permanent invested endowment. Community foundations are focused on specific geographic areas (most often a given city), and typically have smaller endowments of their own but also manage donor-directed funds that are restricted to specific individual causes or issues. Most of the familiar large foundations such as Rockefeller or the Bill and Melinda Gates Foundation are private foundations.

A family foundation is a type of private foundation where the board of directors is entirely or mostly made up of the extended family of the founder(s). Some family foundations eventually transition to being freestanding self-perpetuating private institutions not controlled by a single family. Perhaps the most-famous example is the Ford Foundation. Outsiders often erroneously believe that a family foundation can somehow be wrested away from the family's control; in fact, such transitions are always the result of an explicit decision by the controlling family (either when they created the institution in the first place, or later).

Starting at the end of World War II, the United States's high top income tax rates spurred a burst of foundations and trusts being created, of which many were simply tax shelters. President Harry S. Truman publicly raised this issue in 1950, resulting in the passage later that year of a federal law that established new rigor and definition to the practice. The law did not go very far in regulating tax-exempt foundations, however, a fact which was made obvious throughout the rest of that decade as the foundation-as-tax-refuge model continued to be propagated by financial advisors to wealthy families and individuals. Several attempts at passing a more complete type of reform during the 1960s culminated in the Tax Reform Act of 1969, which remains the controlling legislation in the United States. For more details on that legislative history, see [1].

The 1969 law clearly defined the fundamental social contract offered to private charitable foundations, the core of which has been imitated in law by other nations. In exchange for exemption from paying most taxes and for limited tax benefits being offered to donors, a charitable foundation must (a) pay out at least 5% of the value of its endowment each year, none of which may be to the private benefit of any individual; (b) not own or operate significant for-profit businesses; (c) file detailed public annual reports and conduct annual audits in the same manner as a for-profit corporation; (d) meet a suite of additional accounting requirements unique to nonprofits.

Administrative and operating expenses count towards the 5% requirement; they range from trivial at small unstaffed foundations, to more than half a percent of the endowment value at larger staffed ones. Congressional proposals to exclude those costs from the payout requirement typically receive much attention during boom periods when foundation endowments are earning investment returns much greater than 5% (such as the late 1990s); the idea typically fades when foundation endowments are shrinking in a down market (such as 2001-2003).

While most of a foundation's payout is typically grants to non-profits, some foundations also carry out projects as a non-profit organization themselves. (Adding to the confusion, some operating nonprofits use the term "foundation" in their names.) The core differences between a foundation and an operating charitable group are (a) foundation must pay out 5% of its assets each year while a charitable group does not; (b) donors to a charitable group receive greater tax benefits than donors to a foundation; (c) a charitable group must collect at least 10% of its annual expenses from the public in order to remain tax-exempt while a foundation does not. Neither an operating charitable group nor a foundation can pay for or participate in partisan political activity, unless they surrender tax-exempt status including voiding the deductibility of any tax deductions for donors after the surrender or revocation date.

[edit] Foundations in English law

In England, the word "foundation" is sometimes used in the title of a charity, as in the British Heart Foundation and the Fairtrade Foundation. Despite this, the term is not generally used in English law, and (unlike in civil law systems) the term has no precise meaning.

[edit] See also

[edit] Further reading

Lester M. Salamon et al, "Global Civil Society: Dimensions of the Nonprofit Sector", 1999, Johns Hopkins Center for Civil Society Studies.
David C. Hammack, editor, "Making the Nonprofit Sector in the United States", 1998, Indiana University Press.
Joan Roelofs, Foundations and Public Policy: The Mask of Pluralism, State University of New York Press, 2003