The History and Types of Foundations

Foundations play a huge role in the world of philanthropy. There are thousands of foundations in the US and, in 2014, they gave nearly 54 billion dollars to the charitable sector.

In the U.S., we can thank some early philanthropists for the strength and number of foundations.

Specifically, Gilded Age businessmen such as John D. Rockefeller and Andrew Carnegie decided, after accumulating massive fortunes, to give away much of their money.

Rockefeller notably built the University of Chicago and founded the still influential Rockefeller Foundation. Carnegie built libraries and museums and then put his remaining fortune into the Carnegie Foundation.

Later, Frederick Goff, a Cleveland banker, created a twist on the classic foundation and founded a community foundation. 

Foundations may have had a formal air when the first ones were founded. But today, foundations take part in American life and sometimes their founders rank among the best-known celebrities.

Several types of foundations flourish in today's charitable community, creating charitable giving on a massive scale. Here is a brief explanation of foundations as we find them today.

A private foundation (sometimes called independent foundation) is a nongovernmental, nonprofit organization usually funded from a single source, such as an individual, family or corporation.  It is established to aid social, educational, religious or other charitable activities, primarily through grantmaking.

U.S. private foundations are tax-exempt under Section 501(c)(3) of the Internal Revenue Code.

Private foundations are organized either as a nonprofit corporation or as a charitable trust.

Operating and Nonoperating Private Foundations

There are two subgroups of private foundations:

• Operating private foundations set up their own programs to achieve their charitable goals directly. They may also make some grants to other organizations. An operating foundation could be a think tank, a museum, or a research group. Such foundations are not subject to distribution requirements, but they must spend a certain percentage of their income each year on their charitable purposes.
  • One example of a private operating foundation is the  J. Paul Getty Trust. Founded by Jean Paul Getty from an oil fortune, the Trust runs its own programs to promote understanding and preservation of the visual arts, especially in California. The Trust funds The J PaulGetty Museum, Research Institute, Conservation Institute and the Getty Foundation. The Institute is one of the five most wealthy foundations in the US.

Non-operating (also known as grantmaking) private foundations make grants to other charitable organizations that then indirectly achieve the foundation’s goals. These are the foundations that we are most familiar with and to whom charities send their grant applications. Grant-making foundations must distribute a certain percentage of the value of their endowment each year to other organizations.

Perhaps the best known of this type, as well as the largest foundation in the US, is the Bill and Melinda Gates Foundation. Founded by Bill Gates from his Microsoft fortune, the Gates Foundation focuses on making grants in the areas of health and poverty in the developing world

A corporate foundation is a private foundation that derives its grant making funds primarily from the contributions of a profit-making business.

The company-sponsored foundation often maintains close ties with the donor company.  But it is a separate, legal organization, sometimes with its own endowment, and is subject to the same rules and regulations as other private foundations.

Examples of large, well-known corporate foundations include the Walmart Foundation and the Ford Motor Company Fund.

According to the Foundation Center, there are more than 2,600 corporate foundations in the United States with total corporate giving amounting to  $5.5 billion annually (2013).

The Council on Foundations defines a family foundation as one whose funds come from members of a single family. At least one family member must continue to serve as an officer or board member of the foundation and as the donor.

The family member plays a significant role in governing and managing the foundation throughout its life. Most family foundations are run by family members who serve as trustees or directors on a voluntary basis, receiving no compensation. Some large family foundations hire CEOs to run the foundation and employ much staff.

Family foundations come in all sizes. Some are enormous and work on an international scale, such as the Bill and Melinda Gates Foundation while others are small foundations often focused on a single issue or a particular location.

A public charity raises money from the public (individuals, corporations, and other foundations) to provide grants. The IRS does not consider these to be private foundations since their base of support is typically broadly based rather than from a family or corporation. 

A familiar public charity is the United Way, which raises money from the public and then funds charitable nonprofits. Local United Ways support charities in their geographic areas.

A community foundation is composed primarily of permanent funds established by many separate donors for the long-term benefit of the residents of a defined geographic area. Typically, a community foundation serves an area no larger than a state.

Community foundations also provide services to donors who wish to establish endowed funds (commonly called donor-advised funds) without incurring the administrative and legal costs of starting independent foundations.

According to the Council on Foundations, there are more than 750 community foundations in the United States today. The Council maintains a searchable directory of community foundations.

Some examples of community foundations include The Cleveland Foundation and The New York Community Trust.

The top five foundations, according to total assets, are the Bill and Melinda Gates Foundation, The Ford Foundation, J.Paul Getty Trust, the Robert Wood Johnson Foundation, and the W.K. Kellogg Foundation. (Key Facts on US Foundations, 2013 Edition)