September 22, 2017

Comparison of Corporate Foundation Options

CSR Resource Guide

Typically, a corporate foundation refers to either a private foundation or a public charity controlled or managed by a company. Both of these forms are generally organized under section 501(C)3 of the U.S. tax code. But creating your own nonprofit isn’t necessarily the only way to get the benefits associated with strategic, branded giving. In this article, we’ll look at some of the alternatives, and discuss the pros and cons.

The easiest and cheapest alternative to a formal corporate foundation is just making donations directly to charity. The primary benefit of this option are that there is no expensive organization to set up and maintain, and that the company has complete control of the funds until they hand over the check. On the other hand, having some kind of intermediary allows a company to smooth giving over time, provides marketing and branding benefits, and helps to prevent ad hoc giving by encouraging the development of a strategy.

The usual charitable intermediary is the corporate foundation, which is usually organized as either a private foundation or a public charity. While this allows the corporation to have the greatest control, it is expensive, time consuming and can be risky if not competently managed. A significant fraction of private foundations end up paying excise taxes each year because the tax rules governing them are so complicated. 

Donor Advised Funds provide a third option, but are rarely used for corporate foundations. Most are designed for individuals who want to receive a tax benefit, but don't necessarily want to donate to charities immediately. While community foundations were historically the source of donor advised funds, over the last 15 years, nearly all banks and investment brokers have created them in order to capture wealth before it is moved into a private foundation. Most donor advised funds have significant minimum initial contributions, and charge asset and investment fees on any funds in the account. 

More recently, the Instant Corporate Foundation provides an alternative to each of these traditional forms. Designed specifically with privately held or owner-managed businesses in mind, it is inexpensive to start, has no minimum contribution requirement, and has no ongoing annual fees. 

The table below compares features and qualities of the Instant Corporate Foundation™, a typical donor advised fund, a private foundation, and direct corporate contributions.  If you have questions, or need more information, please contact us.

Instant Corporate Foundation™ Donor Advised Fund Private Foundation Direct Corporate Contribution
Best used for… Strategic corporate philanthropy, with additional corporate social responsibility benefits Individuals looking for a charitable tax deduction, but who want to spread their giving out over time Wealthy individuals looking to create a multi-generation legacy, or very large corporations for whom the expenses are insignificant Ad hoc or nonstrategic giving
Startup costs $1,000 setup fee; no minimum contribution Minimum initial contribution required of $10,000 to $250,000 Upwards of $16,000 on average, including accounting, legal, governance and time None
Ongoing Fees 4% of contributions into the account Generally around 1% of assets annually; investment management fees On average, $145,000 per year Minimal direct expense; Significant indirect expense
Time requried to set up < 24 hours < 24 hours 6 months none
Audit & Accounting Included Included in asset fee Required and paid separately Paid separately or an indirect cost; Must keep track of all gifts
Legal Included Included in asset fee Required and paid separately Paid separately or an indirect cost; Must determine deductibility of all gifts
Governance & Transparency Included Included in asset fee Required; Paid separately, provided by foundation board, or staff is hired for this purpose None
Program Activities Included; Paid add-ons for restrictions available Included in asset fee; Community Foundations provide grantmaking research and recommendations; Commericial DAFs do not provide this service Required; Paid separately, provided by foundation board or staff is hired for this purpose Paid separately or an indirect cost; Must determine which charities to support, generate and review applications
Customer Service Included; Paid add-ons for charity firewall and online charity firewall are available Included in asset fee Paid separately, provided by foundation board or staff is hired for this purpose Paid separately or an indirect cost; Respond to charities making requests
Donations of non-cash items Some Some Some Some
Allows split gifts, for which there is a non-deductible component Yes No No Yes
Allows restricted gifts Yes Not typically Yes Yes
Tax Deduction Limits Yes Yes Yes Yes
Tax Deduction Limit for Cash Gifts 50% of AGI 50% of AGI 30% of AGI 50% of AGI
Tax Deduction Limit for Publicly Traded Securities 50% of AGI 50% of AGI 30% of AGI, with additional limitations on company stock 50% of AGI
Tax Deduction Limit for Other Assets 30% of AGI 30% of AGI 20% of AGI 30% of AGI
Deduction basis for gifts of appreciated property (not publicly traded) Fair Market Value Fair Market Value Cost Basis Fair Market Value, assuming gift is made to a 501(c)3 public charity
Deduction timing Gift is deductible when the ICF receives the contribution. Gift is deductible when the DAF receives the contribution Gift is deductible when the Foundation receives the contribution Gifts are deductible when they are received by individual charities
Excise Taxes None Yes, on any non-charitable gifts 2% of net investment income; on any non-charitable gifts; for self-dealing; for failure to distribute income; on excess business holdings; on jeopardy investments None
Control of grants and assets Donor permanently gives control of the asset to the ICF Donor permanently gives control of the asset to the DAF; Donors may provide advice on investments, usually choosing from a limited menu of options Donor permanently gives control of the asset to the Foundation; Foundation may invest funds as it chooses, subject to certain rules Corporation retains all control until a gift is made
Control of donations Donor provides advice to ICF; If the selected charity does not meet IRS requirements, donor will be asked to select another charity Donor provides advice to the DAF, who may or may not approve the distribution to that charity; Community Foundations work with their programs teams to help find suitable charities; commercial DAFs generally only check the IRS deductibility status Foundation retains 100% control of who receives donations; Significant penalties for self-dealing or other prohibited transactions Corporation retains 100% control of who receives donations
Required payout Accounts must make distributions at least once every five years No legal requirement, although most DAFs adhere to the 5% requirement (in aggregate) placed on foundations and have specific rules about distributions 5% of fair market value of assets annually Not applicable
Privacy/Anonymous Gifts Yes Yes No Yes
Who can receive gifts Public charities, and some international charities; Not direct to individuals Public charities, and some international charities; Most community foundations specialize in local giving; Not direct to individuals Public charities, international charities and individuals (in some circumstances) Public charities, international charities and individuals (in some circumstances); Deductibility varies
Growth potential Not applicable Yes, if money is left in the account to invest Yes, if money is left in the account to invest Not applicable
Charity Firewall Yes No Paid separately, or built by foundation staff Paid separately, or provided by staff

 FURTHER READING

How to start a corporate philanthropy program
How to set up a corporate foundation
Why might you want to avoid a corporate foundation?
What are the business benefits of CSR?
What are corporate philanthropy best practices? (coming soon)
How do you make a corporate philanthropy budget? (coming soon)
How do I manage charity requests?
Examples of corporate philanthropy projects (coming soon)