What are foundations and how do they work?

Foundations are powerful tools for driving change and supporting causes that matter. Whether you’ve heard of them in the context of philanthropy or business, foundations play a key role in shaping the world we live in.

But what exactly are they, and how do they operate?

What is a foundation?

At its simplest, a foundation is a nonprofit organization established to support charitable activities. Unlike traditional charities that rely on external donations, foundations typically have an endowment—funds set aside to generate income. This income is then used to fund programs, projects, or other nonprofits aligned with the foundation’s mission.

Foundations can be private or public, depending on how they’re funded and structured. They’re often created by individuals, families, corporations, or even governments to address specific social, cultural, or environmental issues.

Types of foundations

Foundations come in various forms, each serving different purposes:

1. Private foundations
   These are typically established by individuals, families, or corporations. They rely on an initial endowment from their founders, and the income generated from this endowment is used to fund charitable activities.
   • Example: The Fondazione Agnelli in Italy focuses on education and research, supporting projects to improve the Italian school system.
2. Community foundations
   These foundations pool resources from multiple donors to support local or regional causes. They often act as a bridge between donors and community needs, funding a wide range of projects.
   • Example: The Community Foundation for Ireland funds initiatives that enhance community well-being across the country.
3. Corporate foundations
   Set up by businesses, these foundations align philanthropic efforts with corporate values. They support causes that resonate with both the company’s mission and the interests of its stakeholders.
   • Example: The Fondazione TIM by Telecom Italia promotes digital inclusion and education in underserved areas of Italy.
4. Grantmaking foundations
   These foundations primarily distribute funds to other nonprofits or individuals. They don’t run their own programs but instead support existing efforts through grants.
   • Example: The Fondazione Cariplo in Italy is one of Europe’s largest grantmaking organizations, funding cultural, environmental, and social initiatives.
5. Pperating foundations
   Unlike grantmaking foundations, these run their own programs and initiatives, often focusing on research, education, or cultural preservation.
   • Example: The Wellcome Trust in the UK operates research programs aimed at improving global health.

Why are foundations important?

Foundations play a unique role in philanthropy, offering several key benefits:

1. Long-term impact
   With their structured approach and financial independence, foundations can focus on solving deep-rooted issues. They’re often involved in long-term initiatives, such as combating climate change or advancing healthcare.
2. Flexibility and innovation
   Foundations have the freedom to take risks and fund innovative projects that might not qualify for government or corporate support. This makes them a driving force for social and scientific advancements.
3. Focused giving
   Unlike general charitable donations, foundations allow for targeted giving. They concentrate their resources on specific areas, ensuring a greater and more measurable impact.
4. Legacy building
   For individuals and families, creating a foundation is a way to leave a lasting legacy. It’s a chance to reflect their values and support causes they’re passionate about for generations to come.

How do foundations operate?

While the structure of a foundation can vary, most follow these basic principles:

1. Mission-driven approach
   Every foundation operates with a clear mission, outlining the causes or areas it aims to support. This mission guides its activities and funding decisions.
2. Endowment management
   Foundations often rely on an endowment—a pool of assets invested to generate income. This income is then used to fund projects, ensuring the foundation remains financially sustainable.
3. Grantmaking or program operation
   Depending on its type, a foundation may distribute grants to other organizations or run its own programs. Either way, the goal is to address issues aligned with its mission.
4. Governance and transparency
   Foundations are governed by a board of directors or trustees who oversee operations and ensure the mission is upheld. Transparency is crucial, as donors and stakeholders expect accountability for how funds are used.

Should you start a foundation?

If you’re passionate about creating lasting change, starting a foundation could be a great way to amplify your impact. Here are a few reasons why individuals or families choose to establish one:

• Structured giving: Foundations provide a formal structure for philanthropy, making it easier to manage contributions and track impact.
• Tax benefits: In many countries, creating a foundation offers significant tax advantages for donors.
• Legacy creation: Foundations allow you to build a legacy that reflects your values and passions.

That said, starting a foundation requires careful planning. Working with a philanthropy advisor can help ensure your foundation is set up for success, from defining its mission to managing funds effectively.

The power of foundations

Foundations are more than financial entities—they’re vehicles for change. By addressing critical issues, funding innovative solutions, and fostering collaboration, they have the potential to transform communities and shape the future.

Whether you’re looking to support a foundation, create one, or simply learn more, understanding how they work is the first step toward making a meaningful impact.