Why might you avoid a corporate foundation?

November 1, 2017 Andrew Schuricht

Creating a corporate foundation isn’t the only way to get the tax, structure, cost savings, branding, and visibility benefits of a strategic corporate philanthropy program. Here are the five reasons you might want to skip the corporate foundation for one of its several alternatives.

Expensive

There is a significant cost for the creation of a private foundation, which nearly always involves hiring an attorney experienced with the process. Once the private foundation is created, an attorney or CPA is required to make sure that the foundation is complying with Department of Treasury regulations. Failing to comply with all the regulations can put the foundation (and managers of the foundation) at risk of paying excise taxes. Annual net investment income is taxed at a rate of 1-2%.

Restrictive

Private foundations file paperwork (a form 1023) with the IRS at their inception. The foundation is limited to the charitable purposes listed on the form 1023, as well as any restrictions present in the foundation’s bylaws or articles of incorporation. Foundations are required to pay out a particular amount each year or risk paying a 30% excise tax on the amount not distributed. Skipping two years results in a 100% excise tax.

Risky

Private foundations that inadvertently make grants to ineligible institutions are at risk of penalties of up to 20%, with an additional 100% if the mistake isn’t corrected. And individual foundation managers that knowingly agree to taxable expenditures are subject to a personal 5% tax up to a maximum of $10,000. If the foundation makes investments that the treasury department considers risky, the foundation will be hit with additional excise taxes. And if the foundation engages in “self-dealing” (making a grant or payment that benefits a disqualified person) it can result in excise taxes of 10% against the disqualified person and 5% against the foundation manager, increasing to 200% and 50% if the mistake isn’t corrected. It’s important to note that these excise taxes are not unusual, and hit even well-run foundations all the time.

Time consuming

Each corporate foundation is a self-contained nonprofit organization, and requires all of the governance activities associated with one, including board meetings, bylaws, filing of tax returns, and development and review of policies and procedures, in addition to any actual grant-making work.

No anonymity

Private foundations do not have the ability to make anonymous gifts. Every gift must be tracked and reported on the annual 990-PF tax return, which is publicly available.

Overkill

There are a few areas in which a private foundation might be preferable to an alternative, but they are narrow cases. For example, do you want to have guaranteed control of the assets, with 100% flexibility on how they are distributed and invested? Or do you want to be able to make grants to individuals, without any charitable intermediary (like running your own scholarship fund)? Those are two cases where a private foundation is the only option. In nearly all other cases, one of the alternatives will be easier, less expensive, and less risky.

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