Most companies consider philanthropy to be an integral part of their corporate strategy. For many years, that simply meant defining philanthropy as something that could help maximize shareholder value.
Within the past decade, especially more recently with the coronavirus (COVID-19) pandemic, the idea of company-sponsored philanthropy has come to include helping the communities in which the company operates.
Evidence suggests customers prefer to do business with, and employees want to work for, organizations with a strong corporate social responsibility profile. We’ve observed that the trend now seems to be companies investing both more time through paid leave for volunteering and more money through charitable gifts and employer gift matches, all to create a positive influence on the communities in which they operate.
Ways Corporations Can Engage in Philanthropy
There is no one-size-fits-all solution to company-sponsored philanthropy. In fact, there are a few vehicles corporations can use to maximize their charitable impact.
In this paper, we focus on the benefits, costs, and requirements of establishing and maintaining one of those vehicles, corporate foundations. Discuss with your finance, legal, and accounting teams the approach best suited for your company and its objectives.
Corporate Foundation Table
|Direct Giving||Donor-Advised Fund||Corporate Foundation|
|Ease of Implementation||Very easy||Simple||Requires legal services|
|Administrative and Compliance Costs||Minimal||Administrative and investment management fees||Ongoing legal, tax, and accounting fees; investment management fees|
|Ownership||None/only restrictions if specified in the terms of the grant||None, but some advisory privileges retained||Full control|
|Privacy||Typically donor choice and can depend on the recipient||Ability to give anonymously, if desired||Disclosed on Form 990 or Form 990-PF|
|Corporate Recognition||One-time||Potential to be recurring||Naming rights and opportunity for ongoing goodwill and publicity|
Direct giving is gifting money or assets directly to a nonprofit organization in the form of cash donations or in-kind gifts. Direct giving often occurs in response to one-off requests from charitable organizations and may not lead to a specific long-term philanthropic engagement.
A donor-advised fund is a separately identified fund maintained and operated exclusively by a section 501(c)(3) charitable organization, or the sponsoring organization. Once a company makes a contribution to the donor-advised fund, the sponsoring organization has legal control over the contribution, but the corporate donor retains advisory privileges concerning the distribution of funds and the investment of assets in the account. The advantage of this approach is the sponsoring organization, not the corporation, is responsible for administrative and compliance costs.
Public Charities and Private Foundations
The third option, and the focus of this paper, is for the corporation to create its own 501(c)(3) organization in the form of a private foundation or public charity. The large majority of 501(c)(3) organizations created by corporations will be private foundations due to the source of contributions and additional administrative and funding requirements necessary to maintain public charity status. The private foundation is typically funded with cash or company stock and is operated and financially supported by the corporation. The foundation makes qualified distributions annually or a minimum amount (approximately 5%) of its assets toward philanthropic causes consistent with the foundation’s charitable purpose which can be aligned with the company’s and its employees’ values, goals, and objectives. The foundation will continue in perpetuity or until the assets of the foundation are fully distributed.
Establishing and Maintaining a Corporate Foundation
A corporate philanthropy program has several advantages, including operational benefits, greater access to capital, and other intangible benefits, such as goodwill, that can help boost a company’s bottom line.
But there are more considerations, such as regulatory rules and administrative costs, to consider for maintaining the foundation’s 501(c)(3) tax-exempt status. For the purpose of simplicity, we focus on private foundations as the primary example; the rules and requirements would be different than outlined below for a public charity foundation.
Benefits of a Corporate Foundation
For-profit organizations may use charitable donations to reduce pretax income by up to 10% each year, and excess donations can be carried forward for an additional five years. Further, companies that develop their brand as a positive corporate citizen stand to benefit from increased customer and employee engagement and advocacy. For example, a corporation can expand its employee engagement through programs such as matching gift plans or scholarships. This could help attract and retain top talent and may boost an organization’s reputation and goodwill. All of these factors could serve to make the corporation stronger and will likely be reflected in its long-term performance.
From an investor’s perspective, a private foundation could make a company appear more attractive.
Many investors are increasingly interested in responsible investing, and more resources are being allocated to businesses that have shown a commitment to strong environmental, social, and governance values. Simply put, corporate philanthropy is a good way for a business to separate itself from its peers in the investment universe.
Mission and Strategy
To meet its philanthropic objectives, a corporate-sponsored foundation should have a clear mission and strategy that establishes guidelines for management and distribution of assets. An organization’s mission is important because the tax-exempt status of a foundation is granted based on its expressed charitable purposes; for example, Form 990-PF, which a private foundation must file each year, specifically requires a foundation to state its mission.
Further, having a defined mission helps to serve as a buffer for grant requests that are outside of the company’s focus area. For example, if the foundation’s stated mission involves the environment or animal welfare, but it receives a grant request from an organization focused on the arts, the foundation could deny the request on the grounds that it falls outside the scope of its mission rather than implying that the arts are not important to the organization, allowing it to remain focused on its core mission without compromising its reputation.
Board members are considered to be fiduciaries and are typically held to a high standard, requiring a significant time commitment from each member. While it is common for company-sponsored foundations to “borrow” executives from their company to govern the foundation, it can be helpful to hire a professional advisor, co-fiduciary, and/or a legal services firm to help shoulder the ongoing responsibilities.
For additional information on governance responsibilities, please see our white paper Company Sponsored Foundation Annual Governance Checklist.
Strong governance and oversight policies are critical to enable a company to operate its foundation in compliance with all applicable and relevant laws. A carefully constructed and clearly defined investment policy statement that matches the risk-return profile of the foundation is essential. Further, the corporation should consider developing grant-making guidelines to designate areas of focus and provide direction on the application and inquiry process and adopting a conflict of interest policy.
Private foundations established by corporate donors may also be subject to state charitable solicitation laws that require charitable organizations to file financial reports and reports of their solicitation and fundraising activities. Further, a corporate foundation will have federal tax reporting obligations. It is recommended that a corporation operating its own foundation consult its legal and accounting advisors regarding applicable state and federal reporting requirements in order to maintain compliance.
Private Foundation Rules
Additional restrictions apply to the activities and operations of a private foundation. These are often referred to as the “Private Foundation Rules,” some of which are listed below.
- No self-dealing: The corporation, board and governing members, and interested and related parties of the foundation cannot use it for their own personal or business interests. All transactions and distributions must be consistent with the best interest of the foundation’s charitable purpose.
- Meet required minimum distributions: Private foundations are typically required to distribute 5% of the 12-month average of the fair value of their (noncharitable use) assets annually, with certain adjustments allowed for administrative and overhead costs.
- Limit holdings in private businesses: Private foundations must limit their holdings of private businesses to help protect against using a nonprofit organization as a for-profit corporation.
- Avoid investments that could jeopardize the foundation’s ability to carry out its mission: Funds may not be invested in assets deemed too risky.
- Funds must be given to qualified recipients: Distributions from the foundation must be given to qualified recipients, such as 501(c)(3) nonprofit organizations.
Violating any of these rules could lead to taxes and penalties being assessed on the foundation and, in some cases, on its managers, substantial contributors, and certain related persons.
Private foundations are also subject to a tax on net investment income (NII). The NII tax was set to a flat rate of 1.39% following the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019.
Having an organized and structured approach is essential to maximize the effectiveness of a foundation toward corporate philanthropy goals. Creating a checklist is an effective way to review fiduciary responsibilities, investment goals, tax requirements, and grant guidelines.
With the corporate world becoming more philanthropically involved, we recommend understanding the different vehicles available to facilitate charitable giving to help determine the approach that is best for your organization.
About The Endowment & Foundation National Practice Group
The Endowment & Foundation National Practice Group builds on PNC Bank’s long-standing commitment to philanthropy and is focused on endowments, private and public foundations, and nonprofit organizations. Our group is structured to help these organizations address their distinct investment, distribution and capital preservation challenges.
For more information, please contact Henri Cancio-Fitzgerald at email@example.com.