Viewpoints

Establishing a Foundation Corporation

Gerald Archibald

All non-profit organizations, in order to be successful, must establish a quality image and brand.  Public relations, fundraising and development are inextricably connected for those non-profit organizations that recognize the importance of private sector fundraising.

Developing the image of quality and favorable name recognition for your organization is admittedly a difficult task. Maintaining it can be just as difficult as developing it. The experience of commencement weekend leads to the focus for the topic of this column. That is, answering the frequently asked question of, “do we need a separate foundation corporation to focus our public relations, fundraising and development efforts?”

Fortunately, for the non-profit sector, there is a significant amount of accumulated wealth in the United States.  Current estimates project that a staggering $20 trillion of wealth will transfer between generations in the next 25 years. This assumes that we do not have a major stock market decline.

Many non-profits have responded to these factors with increased private fundraising and development efforts. The past 20 years also have seen a significant increase in the number of foundations established by non-profit organizations.

There are several key items to consider in deciding whether a separate foundation corporation should be formed. A separate foundation can: protect the assets accumulated by the non-profit from potential loss resulting from litigation; provide focus to the fundraising and development efforts of the non-profit; increase the ability to attract and retain board members who are interested in fund-raising activities, improve the public image or “brand” of the non-profit; and segregate assets for financial-reporting purposes.

Foundations are fairly easy to establish. Developing and maintaining a successful foundation is a more difficult task. After a foundation is established, it is frequently difficult to evaluate success. This is generally due to the fact that much of the fundraising and development efforts are directed at planned or deferred gifts. Planned and deferred-giving results may not occur for many years after the effort is made by foundation management and Board members, to contact, cultivate and recruit the prospective donor.

Planned giving efforts are like planting acorns: You have to wait a long time in order to see results. That means that in the short run, a foundation must pay for itself. Generally, most organizations plan for a start-up period for any foundation of up to 18 months. After start-up, the foundation should be able to generate sufficient annual income to offset its operating expenses. The old rule that “you have to spend money to make money” applies also to successful foundations. After achieving breakeven financial results, most organizations should achieve a return on investment of anywhere from 3 to 5 times or more the amount of annual operating expenses for the foundation.

I am frequently asked questions regarding when is the best time to form a separate foundation corporation. Please be aware of the following personal opinions and criteria in response to the questions of “when”.

1) The organization must have a core nucleus of three to five Board members who are interested in fundraising and properly connected through their network of business contacts.

2) The organization should have the expectation of raising a minimum of $100,000 each year from its fundraising and development activities.

3) Accumulated investment reserves of the sponsoring organization should be at least $750,000 with the expectation that the accumulated reserves will grow to a level of more than $1.5 million.

A key decision to make in the formation of any foundation is the issue of who controls the foundation’s activities. Prior to recent accounting rule changes, the most common definition of control focused on whether or not there were common Board members between the sponsoring organization and the foundation. If more than 50 percent of the Board members were common to both Boards, then the financial statements of the foundation needed to be combined with those of the sponsoring organization for financial-reporting purposes. Another common provision evidencing control was the ability to appoint Board members to the foundation board.

However, in the last ten years the Financial Accounting Standards Board has issued several pronouncements that have a significant effect on reporting foundation financial activities.

The first pronouncement changed the definition of control from a factual assessment to a more subjective assessment. Under this pronouncement, if the organization has an economic beneficial interest in the foundation and there is substantial evidence of control over foundation activities, then the financial statements of the foundation must be reported together with those of the sponsoring organization. This new definition significantly increases the number of situations where financial statements must be combined.

Another more recent rule from the FASB (No. 136) generated a significant amount of negative response from the non-profit community. The rules of No. 136 redefine the accounting rules for foundations that raise funds as an agent, intermediary or trustee for another organization.

If the foundation raises money specifically for another entity, then the revenue would be recorded in that entity’s financial statements with a corresponding receivable from the foundation.  The foundation itself would record a liability to the sponsoring organization for all funds collected as an agent or intermediary.

This proposal essentially has the undesirable result of including substantially all foundation activities in the financial statements of the sponsoring non-profit.

Whether you have a foundation established or are considering the formation of a new entity, it is important to be aware of the current financial reporting requirements. In addition, you must perform a thorough assessment of the advantages and disadvantages of a separate foundation.

Disclaimer: The Bonadio Group provides the information in Viewpoints for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in Viewpoints are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.