Everyone has a cause that is dear to their heart. But some individuals are so passionate about these issues that they create charitable organizations to find and fund new ways to benefit society.
If you are such a person, you might be wondering what the difference between a nonprofit and a foundation is so that you can pick the right entity to serve your purposes.
In this article, we will examine the differences between nonprofits and foundations so that you can decide which type of organization is better suited for your needs.
Let’s dive in.
What Is a Nonprofit Organization?
As their name indicates, nonprofit organizations are entities that seek to generate revenue not to make a profit for the benefit of shareholders, but to help improve the world, society, or their local community in a specific way.
Different from not-for-profit organizations—which often include social clubs, professional associations, and fraternities and sororities—nonprofits operate under a clearly defined mission that sets parameters for its goals, its responsibilities, and its methods of fulfilling said vision.
For example, if you wanted to create a nonprofit organization that is seeking to rid the ocean of plastics, your mission statement might read as something like this:
“We seek to rid our oceans of plastic by mobilizing coastal communities, promoting clean up efforts, and encouraging the reduction of plastic usage in everyday life.”
Numerous nonprofit organizations, especially those that are smaller in size, are able to thrive thanks to the work of unpaid volunteers. That is not to say that some do not have paid staff members, or that they don’t hire contractors to help them with different projects.
However, many rely on the work done by individuals donating their time and talent for the benefit of society.
Similarly, nonprofit organizations are led by an unpaid board of directors that uses the nonprofit’s bylaws and mission statement as guidance in their oversight of the nonprofit’s activities.
The board has the legal responsibility to ensure the nonprofit is not only in accordance with the law, but that its work and its use of funds is being used within the parameters of its stated mission.
Nonprofits generate their revenue through donations (small individual donations, large donations, corporate donations) and grants (government grants, foundation grants, corporate grants). Fundraising events and campaigns are also common ways nonprofits secure funding.
Any surplus in funds must be used to either advance the nonprofit’s programs or to invest in the nonprofit itself, rather than being used for the benefit of paid employees.
Nonprofits are most often considered a 501(c)(3) organization. This status is granted to them by the IRS, which makes the nonprofit tax-exempt, and any donations given to them are also tax-deductible. This also means that nonprofits are required to file a 990 form and other financial documentations with the IRS on an annual basis.
Financial transparency is not only recommended, but legally mandated, as the public and the government should be able to see just how the nonprofit organization is spending its raised funds.
For more information on how to create a nonprofit, check out this post on our blog.
What Is a Foundation?
Much like a nonprofit organization, the goal of a foundation is not to make a profit, but rather, to help society through philanthropic actions.
However, while nonprofits use funding to create programs that advance their missions, most private non-operative foundations typically advance their cause by funding nonprofits, scholarships, and other philanthropic programs.
In other words, most foundations tend to work toward a solution by providing other charitable organizations with the financial resources they need to make their vision a reality.
Because they often fund other organizations, foundations themselves do not need to have a clearly laid out mission statement. Some might choose to do so—for example, a foundation might choose to focus on funding scholarships for disadvantaged youths—but it is not a requirement.
While there are some foundations that accept donations, most of them don’t. These entities are often created by either wealthy individuals and families, or by corporations with large profits, and so that is where they get most of their funding.
Some foundations invest their money and then use whatever is generated from that investment to fund different grant prizes.
The Ford Foundation, for example, was originally created by Edsel Ford in 1936 with an initial funding of $25,000.
While transparency is greatly preferred and certainly makes for a better public image, foundations are also not required to fully disclose financial information like nonprofits.
It is important to keep in mind that while there are differences between nonprofits and foundations, technically speaking, there is no legal definition for a foundation. This means that there are entities that use the word “foundation” in their name even though they do not have funds to distribute to other missions, be it in the form of grants or donations.
Foundations can either be private foundations (owned and managed by an individual, a family, or a group of individuals) or community foundations (independent institutions that pool together funds to invest in local societal projects).
Now that we’ve gone over what a nonprofit is and what a foundation is, let’s compare them more closely.
One of the main differences between nonprofits and foundations is their defined mission and their programs.
Nonprofit organizations are required to follow their mission statement. It is this mission statement that serves as a north star to all of their programs, campaigns, fundraisers, and other initiatives.
However, nonprofits actually have a lot of flexibility when it comes to how they achieve this mission through their activities. Nonprofits have the freedom to create their own initiatives and programs that are designed to directly advance their stated mission.
On the flip side, foundations do not necessarily need to follow a specific mission statement since they operate mainly by granting funds to specific missions.
Source of Funding
Nonprofits are funded primarily through donors and grants. Both donations and grants can come from foundations, corporations, government entities, and private individuals.
The amount of revenue generated through these means can be big or small, and they might come through program initiatives, specific campaigns, or fundraising events.
Foundations, on the other hand, are typically funded by their founders. Wealthy families or corporations may create a foundation and set aside some of their own money in order to help a myriad of charitable programs. Sometimes, they might also invest said funds and use the revenue for its grants.
While it is not uncommon for nonprofits to have some paid employees, or for them to hire contractors to provide them with specialized services (a caterer for an event, a graphic designer for a pamphlet, a grant writing consultant to help with applying for grants), their programs, campaigns, and fundraising events are often successful due to the hard work of unpaid individuals donating their time and talent.
Even a nonprofit’s board of directors, which oversees all of the organization’s activities, are unpaid.
By contrast, because foundations are usually created by wealthy individuals, families, or a corporation who donates the initial endowment, it is not unusual for the foundation to be initially staffed with people related to those entities.
The Ford Family Foundation, for example, was at first run by its founder, Edsel Ford and his family members. Upon Edsel Ford’s death, his son, Henry Ford II, assumed leadership.
Which One to Choose: Nonprofit or Foundation?
To know whether a nonprofit or a foundation is a better fit for your goals, you must closely examine your objectives and how you wish to accomplish them.
As stated before, nonprofits must follow a specific mission statement. Foundations have more flexibility. That being said, having some idea of what you wish to accomplish can help you better decide on whether a nonprofit or a foundation is better suited for your end goals.
Let’s look at an example.
While “I want to help clean up plastic from the oceans” can be a good starting point, this is not very specific. To better understand whether a nonprofit or a foundation is right for you, you should ask yourself:
How would you go about cleaning up the oceans?
What would you do with all that plastic?
Who would help you on this mission?
Are your efforts going to be local, nationwide, or on an international scale?
Are you going to focus solely on reducing amounts of plastic in the ocean, or will you also work on educational programs, funding research for the creation of eco-friendly plastic-alternatives, giving coastal communities more access to recycling resources?
Do you plan on working together with other nonprofits? Government agencies? Companies? Local communities? Local businesses? Schools? Universities?
Specific questions such as these can help you better understand not just your goal, but your plan of action.
If you are more focused on the actual efforts of cleaning up plastic from the ocean— having volunteer days where everyone goes to the beach to pick up litter, using the plastic gathered to make decorative merchandise, creating educational resources so children learn the value of reducing plastic consumption—then a nonprofit may be better suited for your project.
However, if you want to focus more on fundingthese initiatives, such as funding scientific research into eco-friendly plastic alternatives or fundingcommunity recycle centers for coastal communities, then a foundation might be the way to go.
Similarly, ask yourself what your sources of funding may be. In most cases, unless you are relatively wealthy, or you own or work with a company that has a steady stream of revenue, you’ll likely be relying on donations.
If that is the case, then a nonprofit would be the better option. However, if you do have your own means of providing funds for your organization, then a foundation could be what you are after.
Wrapping Up: The Next Steps
If you want to make a positive difference in the world, you might be thinking about creating a charitable entity to help your efforts.
From activities, to mission, to sources of funding, knowing the differences between a nonprofit and a foundation can help you better plan for the path ahead. We hope this article is helpful as you embark on your journey to bettering your community and the world.
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