What Is a Private Foundation?
We often encounter people or organizations who genuinely don't understand how a private foundation works and the amazing things they can do. We're here to help solve that problem and share some insight.
"Private foundations are among our most powerful, least accountable, and significantly tax-benefited institutions, so it is all the more unacceptable that they are also among our least understood institutions."
- Joel L. Fleishman
When I found out that my grandfather had planned to create a private foundation, it was entirely foreign to me. My entrepreneurial spirit was excited about the possibilities, but starting a private foundation is not your typical startup scenario nor can you apply the same rules.
Without getting too technical, private foundations are independent legal entities set up for solely charitable purposes whereas public charities rely on public fundraising to support their activities. Funds for a private foundation usually come from a single individual, a family, or a corporation.
Because of how private foundations are funded and controlled, they can set their agendas such as:
- Foundation Missions
- Board Members
- Investment & Giving Policies
If you want to dive deeper into how private foundations operate than I suggest you check out Foundation Source's in-depth post. I'm going to skip ahead to my favorite part and speak more about all the different ways we can make a positive impact in communities all over the globe.
Private investors and venture capitalists spark the creation of new products and services in the for-profit economy, but private foundations are providing capital that powers diverse innovation in the civic sector of our world. Foundations enable groups dealing with climate change, civil liberties, knowledge generation, human rights and more to move into the forefront.
Fun Fact: Did you know it was a private foundation that led the national adoption of the 911 emergency-response system? The Robert Wood Johnson Foundation financed 911 organizations across the United States, brought together emergency responders and created a national confederation that helped the U.S. government on the details of implementation.
The IRS requires private foundations to distribute a minimum of 5% of the previous year's net avg assets annually. This is known as the minimum distribution requirement or MDR. This number fluctuates each year, but it essentially sets an annual budget and guides charitable missions.
Qualifying MDR distributions can include:
- Grants to public charities, and individuals (Including scholarships or emergency aid)
- Direct charitable activities (Ex: Research, publications, technical assistance or conferences)
- Program-related investments (Ex: Loans, loan guarantees or equity investments made to organizations for projects related to the foundation's philanthropic purposes)
It's important to note that private foundations are not limited to only helping non-profitable organizations or those with a 501(c)(3) status. Foundations can give to a wide variety of organizations which may include:
- Civic associations, veterans groups, business leagues, etc...
- Foreign charitable organizations
- Other private foundations
- For-profit businesses running charitable programs
A private foundation is primarily governed by the codes and laws of the IRS. Amendments are continually being made to those laws and how private foundations conduct business is evolving. A new generation is starting to take the reigns and building on the legacy left behind by other noble leaders.
It's essential for those seeking help to understand how private foundations operate. Foundations can play an integral role in sparking growth, innovation or awareness. Knowing all of this can help organizations think outside the box so that they can be more strategic and hopefully make a more significant impact.
Are you ready to do something great? Make sure to reach out to any private foundation that aligns with your goals.