What's a Foundation or Grantmaker?

A foundation is a nonprofit organization that supports charitable activities in order to serve the common good. Foundations are often created with endowments -- money given by individuals, families or corporations. They generally make grants or operate programs with the income earned from investing the endowments.

MCF often uses the term "grantmaker" when referring to our member foundations. The term is a broader label that also includes corporate giving programs, which also give grants, but are not technically "foundations."

What Are the Different Types of Foundations?

There are three basic types of grantmaking foundations:

Independent Foundations
Independent foundations are the most common type of private foundation. They are generally founded by an individual, a family or a group of individuals. They may be operated by the donor or members of the donor's family -- a type often referred to as a family foundation -- or by an independent board.

Because family foundations have unique needs, MCF often refers to Private Independent and Private Family Foundations separately.

Corporate Foundations
Corporate foundations are created and funded by companies as separate legal entities, operated by a board of directors that is usually comprised of company officials. Corporations may establish private foundations with endowments, make periodic contributions from profits, or combine both methods to provide a foundation's resources.

Some companies operate in-house corporate giving programs, which unlike corporate foundations are under the full control of the company and are not required by law to follow the same IRS regulations. Many corporations maintain both a foundation and a corporate giving program.

Community/Public Foundations
Community and other public foundations are publicly supported foundations operated by, and for the benefit of, a specific community or geographic region. They receive their funds from a variety of individual donors, and provide a vehicle for donors to establish endowed funds without incurring the costs of starting a foundation. Community/public foundations are administered by a governing body or distribution committee representative of community interests.

There is also a type of foundation that does not generally make grants, called an operating foundation. The majority of an operating foundation's funds are expended to operate its own charitable programs.

What Limits Are There on Foundation Grantmaking?

Some foundations have broad discretion regarding the charitable causes to which their grants can be directed. Others are sharply limited -- often legally -- by the mandate of the foundation donor. Some foundations are restricted to making grants only to specific causes; others must restrict their grantmaking to a specific geographic area.

How Are Foundations Regulated?

Foundations are governed by stricter regulations than public charities, which generally raise money from the public to operate institutions or programs. Both foundations and public charities might use the term "foundation" in their titles, but very different laws apply to each. The IRS requires that independent and corporate foundations:

  • Annually pay out at least 5 percent of the value of their investment assets.
  • Pay an excise tax of 1 or 2 percent on their earnings.
  • Give money only to other 501(c)(3) organizations, with a few rare exceptions.

Nearly all community/public foundations are considered public charities by the IRS. As such, they are not subject to the same regulatory provisions as independent and corporate foundations.