Why would you want a corporate foundation?

Companies generally start foundations (or alternatives to corporate foundations) to help formalize their philanthropic programs. Ad hoc, nonstrategic giving is expensive, ineffective and time consuming, and a formal program can help to prevent that. Here are the four main reasons that companies start their own foundations. 

1. Tax Benefits

While there can be tax benefits for a corporate foundation, there are really only a couple of special cases in which a foundation or charitable intermediary is necessary. One common misconception is that gifts to charity provide some additional tax benefit to the company. In fact, the way a donation reduces corporate tax is by being considered a legitimate business expense, and thereby reducing taxable profits. There is no extra tax benefit to making a charitable gift.

So how are there any tax benefits at all? Suppose your company usually gives $20,000 to charitable causes around the holidays. But this year has been amazingly profitable. One of the ways you can avoid paying more tax is by giving some of that profit away to charity, and reducing your taxable income. With a foundation you could stash some of that profit away, avoiding the tax, and pre-fund your charitable giving for the next several years. Corporations can keep their giving relatively constant by funding the foundation in good years, and by spending down the accumulated fund in less good years. 

The other case in which a charitable intermediary can provide a greater tax benefit is by accepting appreciated assets. In some cases, gifts can be deductible at fair market value. If fair market value is more than cost basis, the company can reduce their taxable income by the higher amount. For example, if a company paid $10,000 for a publicly traded stock that is now worth $20,000, they can donate the stock and reduce their taxable income by $20,000.

2. Branding and visibility

Generally, corporate foundations are named after the firms that create them. This connects the donations back to the company, and provides some public visibility. Because it is expensive to start a corporate foundation, most of them are connected with larger companies. Therefore, consumers assume that a company with a corporate foundation is large, giving smaller companies the opportunity to look bigger than they are. 

In addition to visibility, companies with a good corporate philanthropy strategy can gain benefits to their brand. Brands that are strongly associated with a particular cause have the opportunity to connect more deeply with customers, employees and other stakeholders.

3. Structure

A formal structure around philanthropy helps to prevent ad hoc, non-strategic giving. In the absence of this structure, donations may be made by various departments and from multiple budgets. Ad hoc giving has been shown to be less beneficial to a company than no giving at all. 

The mere existence of foundation also tends to encourage the development of goals and metrics that can be used to evaluate whether or not the philanthropy program is having its intended effect. 

4. Cost savings

The least cited but most important benefit of having a corporate foundation is being able to politely deflect charity requests. Companies that are known in their communities for being generous are on every nonprofit’s target list, and a particularly well-known local firm might get more than 10 requests a day. Routing requests to an online form or foundation email address prevents owners, managers and employees from having to field every request individually, perpetually reinventing a process for evaluating those requests. A foundation with clear giving priorities can also help prevent hard-to-deny requests from customers, employees and friends.