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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. 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.

Jersey is considering introducing civil law type foundations into its law: see Foundations: Proposals for a new law (pdf file).

The object of this new law is to constitute institutions similar to a trust while avoiding the conceptual and legal problems which trusts, steming from common law conceptions, present in civil law jurisdictions. This consultation paper has a useful general discussion on foundations.

"Foundations" in English law

In England, the word "foundation" is is sometimes used in the title of a charity, eg the British Heart Foundation, the Fairtrade Foundation. Apart from that the term is not generally used in English law, and (unike in civil law systems) the term has no precise meaning.

Foundations in US law

A foundation is a type of philanthropic or charitable organization set up by individuals or institutions as a legal entity (as 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 Misplaced Pages, 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 two infamous "robber barons" 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 and the like. Rockefeller did some of that as well (notably building the University of Chicago), but ended up giving 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 obviously simply tax havens. President Harry S. Truman publicly raised this issue in 1950, resulting later that year in a federal law that established some new rigor and definition to the practice. That law did not go very far in regulating tax-exempt foundations, however, made obvious throughout the rest of that decade as the foundation-as-tax-refuge model continuing to be propagated by financial advisors to wealthy families and individuals. Several attempts at passing more-complete reform during the 1960s culminated in the Tax Reform Act of 1969, still the controlling legislation in the United States. For more details on that legislative history, see ].

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% (e.g. the late 1990s); the idea typically fades when foundation endowments are shrinking in a down market (e.g. 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. (And even more confusingly, 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, a charitable group doesn't; (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, a foundation doesn't. Neither an operating charitable group nor a foundation can pay for or participate in lobbying for legislation at any level of government, unless they surrender tax-exempt status including voiding the deductibility of any tax deductions for donors after the surrender or revocation date.

See also

• Charitable organisation
• Charitable trust
• Ford Foundation
• Foundations in Canada
• List of wealthiest foundations
• Malian Foundation
• Offshore foundation
• Program evaluation
• Rockefeller Foundation
• Simone and Cino Del Duca Foundation
• Tom Joyner Foundation
• Wikimedia Foundation

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

External links

• UK Charity Commission.
• Foundation Source, Inc.
• American Endowment Foundation.
• The Foundation Center, a Clearinghouse of Information on the approximately 70,000 U.S. foundations
• Council on Foundations
• U.S. Corporate Foundations
• Canada Revenue Agency - Annual Registered Charity Information Returns
• Charity Navigator - quantitive rankings of US-based charities/foundations
• Legal Information for Charitable Foundations Legal information on forming and running a charitable foundation.
• Canadian Landmine Foundation

• Foundations