Information > Financial Terms > This page

Source: Encyclopedia of Banking & Finance (9h Edition) by Charles J Woelfel
(We recommend this as work of authority.)

As defined by The Foundation Center, non-profit, nongovernmental organizations set up as corporations or trusts usually under state laws to receive funds (but not normally to solicit contributions from the public) and to distribute funds for the advancement of human welfare.

The number of foundations in the U.S. organized for nonprofit charitable, educational, and scientific purposes increased during the past three decades from a few to relatively large numbers with substantial financial worth as the result of rise in security values.  Stimulus for this growth had been provided by beneficent tax treatment, which provided for tax exemption under certain requirements.  Motivations for foundations have included realizing substantial tax savings in the settlement of large estates and perpetuating particular concentrations of holdings, as well as bona fide interest in the eleemosynary purposes.

Of the nearly 26,000 foundations nationwide in the 1980s, ranging in size from under $10,000 to over $4.8 billion (the Ford Foundation), more than 90% are known as independent or "family" foundations.  Other types of foundations include operating foundations, whose primary purpose is to carry out their own charitable works; company-sponsored or corporate foundations; and community foundations, which derive their funds from many donors and are generally classified as public charities under the tax laws.  There are less than 300 of this type.

The growth of foundations accelerated after the imposition of federal income taxes and reached a peak in the 1950s.  As security values rose, relatively modest foundations grew in size in substantial financial worth.  Growth was encouraged by favorable tax treatment, which not only exempted charities from income tax but also permitted deductions from income, gift, and estate taxes.  While tax incentives provided an additional stimulus, the primary motivation for creating a foundation was more deeply rooted in the personal philosophy of the wealthy and a desire to establish a vehicle for systematic giving.

The Tax Reform Act of 1969 imposed tighter restrictions upon foundations, resulting in a drop in new formation in the early 1970s.  After modification, most recently in 1985, current regulations include:  (1) a 2% excise tax on net investment income; (2) an annual minimum payout rate of 5% of the market value of net investment assets; and (3) a variety of tax penalties for such acts as self dealing, excessive business holding, jeopardy investments, and improper grant activities or taxable expenditures.  Federal law also requires private foundations to file an annual information return (990-PF) that is publicly available.

Recent Trends:  After a decade long decline that started in 1972 attributed to inflation, poor investment strategies, and a higher payout requirement under the Tax Reform Act of 1969, foundation assets began to show real growth after 1981.  The easing of inflation in the mid-1980s allowed for solid gains in the constant dollar value of both assets and grants.


EDIE, JOHN A.  First Steps in Starting a Foundation.  Council on Foundations, 1987.

FREEMAN, DAVID F.  The Handbook on Private Foundations.  Council on Foundations, 1981.

ODENDAHL, TERESA, Ed, et al.  America's Wealthy and the Future of Foundations.  The Foundation Center, 1987.

FOUNDATION CENTER.  National Data Book, 1984-1987, Editions 98-12.

Back to Information