What is a Community Foundation?
A community foundation is a tax exempt, non-profit, publicly supported philanthropic organization with the long term goal of building permanent, named funds, for the broad-based public benefit of the residents in a given area. #DoMoreGood
Frequently asked questions
What is a community foundation in general?
A community foundation is a tax exempt, non-profit, publicly supported philanthropic organization with the long term goal of building permanent, named funds, for the broad-based public benefit of the residents in a given area.
The common mission of every community foundation is to enhance the quality of life in the local area. Community foundations carry out this very broad mission by building permanent endowment funds and using a portion of the annual income to support a variety of local nonprofit organizations through grants and special projects.
Most community foundation assets are held in separate funds established by local individuals, families, businesses, or charitable institutions. Each fund may have a special purpose, but the foundation board of directors, representing the community, oversees them all.
The IRS recognizes community foundations as public charities in part because they receive support from the general public and their boards broadly represent the areas served.
How does a community foundation work?
A community foundation is governed by a board of directors of community leaders and is administered by professional and/or volunteer staff. Operating expenses are paid from an annual fund fee and from gifts designated by donors to cover foundation operating and program costs.
How do community foundations differ from private foundations?
A community foundation is supported by a broad and ever-widening group of unrelated individuals, families, corporations, and institutions. The only thing that connects all of our donors is a desire to improve local communities. Because of their broad base of support, community foundations are classified by the IRS as publicly-supported charities. This gives community foundations tax advantages not enjoyed by private foundations.
Community foundations are also allowed to treat all funds within their control (known as “component funds”) as part of a single corporation. This gives them administrative and investment advantages over private foundations as well.
Private foundations, by contrast, are generally supported by a single individual, family, or business. Rarely does it make sense to establish a private foundation if the principal endowment is not large. Today, of course, the world’s largest foundations — Gates, Ford, Kellogg — are all still private foundations.
To prevent abuse and self-dealing, private foundations have been subjected since the 1970s by the IRS to numerous penalty taxes and legal requirements.
How do community foundations differ from other nonprofit organizations?
Most nonprofit organizations have a specific mission. By contrast, a community foundation’s mission is very broad: to improve the quality of life in a given area. This breadth of mission reflects our ability to make grants in any field of interest with a charitable benefit to local communities.
This flexibility allows us to serve a wider group of potential donors on the one hand and, on the other, a wider group of nonprofit organizations whom we consider our partners in improving local communities.
Area nonprofits benefit from having a local community foundation because the community foundation helps money stay in a community. Community foundations benefit local nonprofits in other ways, too: besides having local grant money available, some nonprofits ask the community foundation to manage an endowment on their own behalf. We call such funds “agency endowment funds.”
As it grows, a community foundation gradually becomes a center for charitable giving in a community. We help make connections between the people who want to give and the people who need their support.
How can I find out more about community foundations?
The internet is an extraordinary tool for learning more about community foundations. Community foundations have long been among the most innovative and progressive grant-making institutions in the United States. Many have taken full advantage of the internet’s possibilities.
Perhaps the single best resource is the long list of community foundation websites, available from the Council on Foundation’s website.
What is an endowment?
An endowment is a type of fund that is set up to produce income for charitable purposes. A typical endowment fund will distribute only the income generated from investments. Its principal will never be distributed. A typical distribution rate from a foundation endowment fund is 4% or 5% per year.
An endowment fund is likely (though not, of course, certain) to remain permanent as long as principal is never invaded, and as long as the distribution rate reflects the long-term growth patterns of investments.
Are all funds with the Community Foundation endowed?
No. Some donors prefer to see a greater percentage of their gift distributed annually.
What happens to a contribution to the Community Foundation?
There are several possibilities, depending on a donor’s wishes.
The major possibilities are five:
If a donor makes an unrestricted gift, the contribution will be added to and permanently recognized in The Community Fund. (Alternatively, some donors may wish to establish and name a separate unrestricted fund.) The income from the total fund (built up by many donors over many years, one gift at a time) will be distributed annually for charitable purposes as determined by the board of directors. Unrestricted contributions directly support our competitive grant process.
Other donors may want to support a general area or field of need in our county (education, children’s health, or arts and culture, for instance). Such field of interest gifts support the donor-intended areas in our grants program. These contributions will never be used for projects outside their specified area. Contributions of any size are always welcome to support these funds. Again, all specific grant-making decisions from field-of-interest funds are made by our board of directors.
A few donors ask us to restrict the use of their gift to one or more specific nonprofit organizations. These gifts create what are called designated funds. A community foundation will often be asked to handle such gifts because of its experience with managing endowments and providing oversight in the annual distribution.
Many donors choose to establish donor-advised funds. In this case, the donor may periodically recommend to the foundation that a distribution be made to a specific nonprofit organization. (The Foundation is not legally bound to follow these recommendations. However, we will do so in most cases when the intended grantee is a legitimate nonprofit organization and operating in good standing with the IRS.)
Donor advised funds are especially suited to donors with a variety of charitable interests and an interest in being involved with philanthropy. They are an attractive alternative to establishing a private foundation, which is typically less efficient and more costly.
What are the tax advantages of donating to a community foundation?
We offer the best tax advantages for charitable donations available under law. We are a publicly-supported non-profit organization, qualified under section 501(c)(3) of the internal revenue code. By avoiding classification as a private foundation, we are able to offer greater tax advantages than does a private foundation.