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What exactly is “philanthropy”?
“Philanthropy” literally means “love for mankind” (from the Greek). Some people use the word to refer to charitable giving exclusively, while for others it is also synonymous with volunteering and giving, as well. For others still, “philanthropy” connotes the work of the entire nonprofit sector.
In the regional association world, we tend to think of philanthropy as embracing both giving and volunteering. We also often use it as shorthand for “organized philanthropy,” which refers specifically to formalized giving by organizations, such as foundations and corporate grantmaking programs. In contrast, we usually say “individual giving” when we’re discussing personal philanthropy.
Is there a difference between “philanthropy” and “charity”?
The words “charity” and “philanthropy” are often used interchangeably, although many people make distinctions between the two. Some think of “charity” as alleviating the symptoms of suffering, while “philanthropy” tries to address root causes. Others view “charity” as limited largely to helping the needy, while “philanthropy” also encompasses purposes like the arts, science, and environmental protection. Most people in our field use charity to denote individual giving and typically identify philanthropy with either individual or organized giving.
What exactly is “grantmaking”?
The word “grant” refers to the monetary awards made to nonprofits by foundations, corporations, or government agencies. The term “grantmaking” therefore refers to the practice of giving money. The term “grantseeking,” on the other hand, is the practice of raising money.
The general public and some nonprofits use “grant” as shorthand for “grant proposal,” the document prepared by a nonprofit to apply for funding. This habit often creates confusion about what a “grantmaker” is, and hence, about what a “regional association of grantmakers” does. No matter how carefully you’ve explained it, some people will still think your organization helps people raise money.
What is a “foundation”?
Alas, this is probably the most slippery word of all! In our field, “foundations” are only those organizations that use their resources primarily to grant funds to other entities. (See below for an exception called an operating foundation.) Many people, however, use “foundation” to describe any kind of charitable or nonprofit organization. For this reason, we sometimes use the term “grantmaking foundation” to be precise.
To make matters even more confusing, the government has its own definition of foundation. The IRS puts most nonprofit organizations into one of two broad categories—“private foundation” or “public charity.” Both categories are classified as nonprofit organizations under Section 501(c) 3 of the tax code, but they are treated differently by the law.
How does the IRS distinguish between private foundations and public charities? More important, why?
The criteria for distinguishing between public charities and private foundations, is hard to understand at first, because the government’s concern lies with accountability rather than function. Most people are inclined to describe an organization in terms of what the organization does, such as providing services or making grants. Lawmakers, however, are more interested in where the nonprofit gets its funds than with the organization’s purpose. The logic is that an organization relying on funds from more than one source is inherently more accountable than an organization closely controlled by a single donor.
The law thus assumes it doesn’t need to regulate an entity with multiple funding sources as highly as an organization with only one donor. The tax code, therefore, permits the former to operate under less restrictive rules. The IRS calls the more “publicly” accountable organization a “public” charity, the more “privately” held entity a “private” foundation.
What are the common characteristics of private foundations?
Private foundations are funded entirely by an individual, family, or corporation. They are usually endowed, meaning they have permanent assets. They generally make their grants out of the interest earned by investing those assets. Private foundations are typically focused primarily on grantmaking, and generally do not actively raise funds or seek public support.
Are “independent” foundations the same thing as “private” foundations?
Independent, family, company-sponsored, and operating foundations are all subsets of private foundations. With the exception of operating foundations, these secondary designations have no legal meaning but are widely used in the field to describe common types of foundations.
- Family foundations are usually created by a single individual or family and are governed at least in part by the donor or the donor’s family, descendants, or close associates. The foundation generally supports the donor(s)’ personal charitable interests. Family foundations make up the largest proportion of grantmaking organizations, by far.
- Company-sponsored (or “corporate”) foundations are created by for-profit companies. They receive their funds from their parent companies, but they are separate legal entities. Companies can also make charitable contributions directly out of the corporate budget. This practice is called “direct corporate giving” or “corporate contributions.” (For various reasons, many corporations use both a foundation and a direct giving program.)
- Independent foundations often begin as family foundations but are later no longer controlled by the benefactor or the benefactor’s family. Most of the country’s largest foundations fall into this category.
- Operating foundations use their funds to operate their own programs rather than make outside grants. They are classified as private foundations, however, because they generally do not raise enough funds from the public to qualify as public charities. They are a relatively small part of the foundation universe.
What does “grantmaking public charity” mean?
Most of what we commonly think of as nonprofits are legally classified as public charities, whether they are ballet companies, universities, or homeless shelters. A small percentage of public charities do make grants as part or all of their activity, so we call them “grantmaking public charities.” Many are regional association members.
What are some examples?
- Community foundations are the most obvious kind of grantmaking public charities. They receive and administer funds from a variety of donors in a defined geographic area (usually a city or town, but sometimes part or all of a state). They are governed by community representatives and typically limit their grantmaking to their immediate region. Community foundations are increasingly serving as vehicles for donors who wish to be hands-on in their philanthropy.
- “Public foundation” is the name given to most grantmaking public charities other than community foundations. Many are population or cause specific, such as local women’s foundations, Jewish federations, and disease-related funds. Many foundations established by celebrities are really grantmaking public charities.
Why do I need to know this government jargon?
Understanding the tax status of your member grantmakers is key to understanding your members themselves. Private foundations, for example, must follow complicated, burdensome regulations that directly affect their grantmaking and other aspects of their operations. Regulatory issues are, therefore, of great interest to your members. Legal and regulatory matters are always hot program topics and popular newsletter features, not to mention being the focus of your regional association’s public policy efforts.
All regional association management and program staff should be familiar with these regulations to some extent. There’s no need to learn them all at once. Once you’ve mastered the difference between public charities and private foundations, a good place to start is with something called the minimum payout requirement. Other key topics include the lobbying regulations, self-dealing rules, grants to non-charities, and excise tax. If your work focuses on promotion of philanthropy efforts, understanding the various types of charitable deductions should be one of your priorities as well.
Another reason for understanding these distinctions is that data on organized philanthropy is usually collected on the basis of these categories. That data often includes only private foundations (family, company, and independent) and community foundations, but leave out other grantmaking public charities and direct corporate giving programs.
How can I determine a particular organization’s tax status?
The IRS requires all charitable organizations to file an informational return each year, even if the group doesn’t owe any taxes. The form filed by public charities is called the 990 (your regional association probably fills out one of these), while private foundations file the 990-PF. Besides tax status, the latter contain information on how much money the foundation has, what it funds, and who the trustees are. This sometimes comes in handy when you are trying to research a member or prospective member. These forms are public information and can be easily accessed online through GuideStar. Directories like Foundation Center’s Foundation Directory Online also list tax status information.
FACTS AND FIGURES
How many foundations are there, and how much money do they represent?
More than 81,000 exist in the United States, with family foundations being the vast majority. In 2011, foundations held over $662.3 billion in assets and made more than $42.2 billion in grants.
Where does all the money go?
The largest share of foundation dollars goes to health, with the largest number of grants going to human services. This has been a consistent pattern over time, though the exact proportions vary from year to year. Other leading categories of giving include education, the arts, public affairs/society benefit, and the environment.
Who are the leading foundation executives?
The Bill and Melinda Gates Foundation’s $34.6 billion in assets (as of 2011) put them at the top of the list. The next closest was Ford Foundation with a mere $11 billion in assets. The biggest community foundation is the Tulsa Community Foundation ($4.02 billion). The top corporate foundation was the Sanofi Foundation for North America, as measured by total giving ($497.5 million), not assets.
I keep hearing about all these new foundations. Has the field really grown in recent years?
Absolutely. Between 1990 and 2010, the number of active grantmaking foundations more than doubled from approximately 32,000 to over 76,000.The number of dollars granted by foundations has more than quadrupled since 1990—and despite the cooling of the economy, is still growing (albeit more slowly).
Are there any more current figures available?
Data on philanthropy usually reflects about a two-year lag time. The reason is that the information is usually collected from tax forms, which may not be filed until several months after the close of the fiscal year and aren’t available from the IRS for some time after that.
How important is regional philanthropy?
Extremely! The vast majority of foundations give only in their local communities. Just over 1,100 out of the total 81,777 foundations give nationally or internationally.
Is it true that foundations and corporations are the largest funding source for nonprofits?
Not by a long shot. Foundation and corporate grantmaking together accounts for only about 19 percent of all charitable giving in America. Individuals and bequests provide the rest, which was an estimated $234.6 billion given in 2010. Foundations only represent a modest portion of the resources that support the nonprofit sector but their importance has been increasing for many nonprofits.
What are some of the other common myths and misconceptions about foundations?
- Myth: Foundations are essentially charitable banks. Inexperienced grantseekers often assume grantmakers operate like loan officers, doling out funds according to the absolute rather than relative merits of each proposal. In fact, foundations have their own missions and goals and view their grantmaking as a means to these ends. Grantmakers play many other valuable roles in communities beyond writing checks. These include providing civic leadership, policy expertise, and nonprofit technical assistance; acting as neutral conveners to bring people together; and using foundation dollars to leverage other community resources.
- Myth: Grantmakers have more money than they know what to do with. Don’t believe all the spam you see. Even the largest foundations and corporations receive far more requests than they can actually fund.
- Myth: Foundations are short-term funders and seldom provide general operating support. These statements may or may not be true for large national foundations. Local and regional funders, however, often maintain relationships with key organizations in their communities over long periods of time. And don’t forget that the “checkbook philanthropy” practiced by many of your smaller or less sophisticated members is often made up of annual operating contributions to a group of regular recipients.
- Myth: Foundations have an ideological bias. Liberals stereotype foundations as being conservative; conservatives accuse foundations of being liberal. In reality, foundations are as varied in their approaches as any other institution in American life—and most have no ideological orientation at all.
Are there any major debates and controversies in the field of organized philanthropy?
Many. Just a few include how much money foundations should be required to pay out each year; how faithful foundations should be to “donor intent”; how involved they should get in public policy; whether they should be proactive or reactive in their grantmaking; how hands-on or hands-off they should be in their grantees’ internal affairs; whether they are sufficiently focused on outcomes; and how accountable they are to the public.
All information in this section was taken from the Philanthropy 101 Series created by the Forum of Regional Association of Grantmakers.