How to set up a foundation
Get the key insights into how, and why, creative organisations set up foundations.
Some not-for-profit organisations choose to set up a foundation—a separate legal entity—for the purposes of raising funds.
If you are considering establishing a perpetual foundation (‘foundation’) for the benefit of your organisation, it is recommended by professional bodies, such as Philanthropy Australia, that you conduct a feasibility study into whether it will be financially viable, as well as strategically appropriate, to channel resources into the setup and maintenance of a separate legal entity.
Setting up a foundation is not vital for every not-for-profit but they can be advantageous for some organisations. The foundation will usually then be responsible for coordinating and managing the fundraising activities of the not-for-profit organisation.
Setting up a separate foundation entity solely focused on fundraising can increase your organisation’s capacity to access private sector and government fees.
What are the advantages of a foundation?
There are many potential advantages involved in setting up a foundation. For example:
- Having a separate entity solely focused on fundraising can increase your organisation’s capacity to access private sector and government funds.
- The foundation will be governed by a separate board of directors. This can offer the opportunity for high profile chairs and board members with the right networks to lead the fundraising efforts with vision and energy, donating significant funds themselves.
- Dedicated foundation staff with the right expertise can spend time nurturing relationships with donors.
- The foundation can provide the distinctive fundraising ‘face’ of the organisation.
What are the potential disadvantages of a foundation?
While there are many benefits involved in setting up a foundation, it’s not be the ideal course of action for every organisation. There can be disadvantages involved in the set up and maintenance of a foundation. Here’s a few quick examples:
- The cost of establishing a separate legal entity, e.g. legal costs to establish a separate or independent Foundation and obtain the relevant tax and/or charitable status.
- Some organisations simply do not have the capacity or specialist expertise available to create and resource a separate Foundation.
- There will be ongoing obligations to fulfill in running the foundation, including reporting and regulatory requirements.
- The interaction of the foundation brand and organisation brand need to be carefully managed to ensure they enhance each other, rather than compete against each other.
Sometimes when a foundation is established it is done so as a fund where the gifts it receives are invested and the income earned used for various programs of the organisation; essentially an endowment.
Alternatively, the foundation, when constituted, may choose to establish a separate endowment fund (‘endowment’) which it then manages. This is a fund that is invested, allowing the principal to grow whilst using a portion of the investment return to meet ongoing requirements.
They’re becoming more popular among not-for-profit organisations as they look to develop sustainable income streams.
Events such as sale of an asset, receipt of a major gift or bequest or a successful capital campaign are all potential triggers for the establishment of an endowment.
Endowments are often used for funding expenses which are considered harder to raised money for, such as general operating expenses. Once again, there are advantages and disadvantages to setting up and maintaining an endowment.
What are the advantages of endowments?
- Opportunity to create a legacy to ensure an organisation can carry out its work well into the future; perpetual income means some greater financial security to do this.
- Marketing opportunity for specific donors who want to contribute in this way—it is sometimes easier to obtain “untied” gifts.
- Organisations may be viewed positively by potential donors for demonstrating stability and planning for the future.
- Where the foundation invests funds into an endowment, these monies are protected from misuse.
- Can offer the opportunity for high profile and skilled chairs and trustees to lead the fundraising efforts while donating significant funds themselves. These leaders often also have the financial acumen to liaise with the trustee company appointed to look after the investments of the endowment.
- May enable organisations to attract larger gifts; e.g. through marketing the endowment to bequest prospects, you can tap into donor desires for perpetuity and establish a lifelong link with your donors.
- Endowments are often used for funding expenses which are considered harder to raise money for, such as general operating expenses.
What are the potential disadvantages of endowments?
Some of the disadvantages and issues to consider when establishing an endowment include:
- Some organisations do not have the capacity or specialist expertise available to create and manage an endowment fund.
- As with setting up a foundation, there will be legal and other costs to consider.
- There will be fees for engaging trustees or investment managers to manage the endowment. It is very important to have this investment advice, but it can be expensive.
- You will need to establish policies and procedures around the endowment, e.g. minimising the application of endowment income in the early years in order to build a sustainable corpus.
- Money in the bank means less money to spend on today’s mission.
- Some donors may perceive that you do not need future contributions (if donors believe there is a large corpus of funds).
- The risk that donors will elect to support the endowment to the detriment of ongoing regular giving programs.
- The real value of an endowment declines over time and the investment may not keep up with inflation.
- All endowments should develop and maintain an investment policy that governs the manner in which the funds are managed and invested.
Note that organisations that are in financial crisis, do not have a donor base or have not demonstrated a long term vision and record of accomplishments, are unlikely candidates for an endowment.
Setting up a foundation or endowment is a strategic decision that requires management attention and a strong relationship with donors.
In the case of small-to-medium organisations, the costs of set up and maintenance are likely to outweigh the benefits.