Key Distinctions

Essential knowledge about the paths grantmakers and donors can take to create impact.



 

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PUBLIC CHARITY VS. PRIVATE FOUNDATION

Any tax-exempt entity classified under Section 501(c)3 of the Internal Revenue Code is further sub-classified as either a public charity or a private foundation. While many regulations are the same for both kinds of entities, and both are able to receive tax-deductible contributions, each type is subject to certain restrictions and requirements applicable only to that subcategory. Private foundations are usually funded by a single primary source while public charities must meet a "public support" test by raising funds from the general public. Private foundations are subject to regulations about annual "payout" from endowments, self-dealing by trustees, excise taxes, and other matters that do not apply to public charities. (See specific definitions of each in the Glossary.) Note that, by default, all entities are treated as private foundations unless they are able to meet the public support test. Also note that not every organization named "foundation" is legally a private foundation.

ENDOWED VS. PASS-THROUGH

Grantmaking institutions do not all have permanent endowments of invested assets from which they draw the funds to make grants, loans, or other philanthropic transfers (and to pay their operating expenses). Some are established and operate with minimal or no endowment and instead receive or raise new funds on a periodic basis to support their grantmaking and operations. It is best to think of this as a continuum from endowed entities paying out the legal minimum 5% annually on one end, to entities passing through 100% of new funds contributed annually on the other end. There are many variations among grantmaking institutions along this continuum, including many operating with a mix of permanently endowment funds and newly contributed funds. This continuum applies to the range of foundation types as well as to donor-advised funds, though for the latter a required minimum level of fund balance is set by the organizing sponsoring the fund. Note that endowed institutions can be endowed in-perpetuity or for a limited term.

IN-PERPETUITY VS. LIMITED-LIFE

Grantmaking institutions vary in the time horizon for their operations. While many are intended to exist "in perpetuity," either with a permanent endowment or not, many have a set limit to their lifespan, or rules in place for determining the right time to cease operations and close the institution, a phenomenon often called "sunsetting" or "spending down." The methods for how to limit the life of a grantmaking institution vary, from distributing the remaining endowment principal to one or more recipients in large final gift(s), to gradually distributing more and more of the principal over several years, to transferring the operations and assets to a community foundation, or other options. The decision about whether to be an in-perpetuity or limited-life institution can be made at creation, or can be made/modified after years of operation, and sometimes the decision is explicitly left to later generations. Reasons for making one decision or another also vary.

Staffing Variations

While all IRS-classified private foundations must have a governing board, the vast majority of grantmaking institutions have no paid staff (part- or full-time) in the traditional sense. Many are operated through some combination of trustees (who can be volunteers or receive a stipend), paid advisors (e.g., attorneys, wealth or investment managers, philanthropic advisors, etc.), and volunteers (including trustees who volunteer extra time to perform staff functions). In addition, there are some arrangements in which an external organization is paid to perform some or all of the variety of day-to-day staff functions (i.e., charitable, administrative, investment) for a grantmaking institution, including some organizations that provide this service for a great many foundations. The staffing of a grantmaker makes a significant difference in day-to-day operations and governance.