Certain Elements of a Private Foundation

• Charitable Purpose. A private foundation is an organization set up for charitable purposes.
  
• Single Source of Funding. A private foundation is generally funded by one source (usually, one individual, family or corporation).
  
• Grant-making and Program Implementation. Private foundations fall into different categories and can carry out both grant making and operating activities.
  
• Regulated by Internal Revenue Service. In order to obtain "foundation status," the organization must apply to the U.S. government's Internal Revenue Service and is subject to certain regulations by the U.S. government.
  
  

Why Establish a Private Foundation?

• To support a charitable purpose or purposes through tax-exempt funding. Private foundations do not pay taxes on contributions they receive.
  
• Contributions to a private foundation are ordinarily "tax-deductible" for the donor. The U.S. government has established a policy to encourage individuals to make charitable contributions by giving them financial incentives. When individuals take advantage of this policy, government tax revenues (which may be used for similar purposes) are decreased.
  
• Establishing a foundation enables a donor to fund non-U.S. based charities more easily, as long as the foundation practices "expenditure responsibility". This is a series of steps required of private foundations to verify charitable use of funds in its grant making activities. It is the preferred method for making grants outside the United States.
  
• By establishing a foundation, a donor is able carry out other functions of grant-making more efficiently. For example, an institutional structure allows a donor to employ staff through a legal entity, establish a professional track record, finance activities over several years, and so forth.
  
  

Restrictions on Private Foundations

In return for such tax benefits, government places stringent restrictions upon activities and grants for private foundations. Four examples of the many existing requirements:

• Charitable Project Purposes. Projects funded by a private foundation must have a charitable, educational, religious, scientific or literary purpose or must be conducted for the prevention of cruelty to children or animals. Overseas funding from a private foundation will be tax deductible only to the extent that the organization is able to carefully monitor that its funds are being used for charitable purposes.
  
• Contracts with Grantees. Private foundations sign agreements with all their grantees unless they are registered as public charities with the U.S. government. The contracts state how much money is granted and for what purpose. Agreements enable private foundations to track grant-making expenditures in order to ensure that their activities fall within the accepted definition of "charitable purpose." This is necessary in order for foundations to maintain tax-exempt status. Agreements can also serve as reference documents that lay out the responsibilities of all project partners and the intended use and dispersal schedule of grant funds.
  
• Reporting. Private foundations that exercise "expenditure responsibility" must receive reports from their grantees confirming that grant funds were used as agreed and describing the progress of the grant. This usually entails a comprehensive accounting for the expenditure of grant funds and confirmation that the grant funds were used as set forth in the agreement. A description of the progress made and any difficulties encountered in accomplishing the purposes of the grant is also customary. Reports also often include: receipts; photographs; name lists of beneficiaries such as participants in training classes; and other relevant information.
  
• No Political Activities
  
  • Private Foundation. A private foundation is prohibited from carrying out political activities including: attempting to influence legislation; conducting political propaganda; or participating in the election process.
    
  • Grantees. Not only are private foundations prohibited from conducting political activities, but their grantees also may not conduct such activities with private foundation funds.
    
    

Penalties for Non-Compliance

• Against Grantee. If a grantee does not comply with its obligations as set forth in an agreement, e.g. regarding using the funds as described in the agreement or providing reports in a timely manner, a private foundation has the right to (and, in some instances, must) revoke the agreement. Furthermore, the private foundation is prohibited from disbursing any more funds to the grantee until the grantee has complied with its obligations.
  
• Against Foundation. If a private foundation does not comply with its obligations under U.S. law, the U.S. government may levy heavy fines upon the private foundation and, in extreme cases, may revoke an organization's status as a private foundation.