Once you have decided to establish a private foundation, there is an important choice for you to make: whether to structure your foundation as a corporation or as a trust. There are advantages and drawbacks to each approach, and each entails different operational and legal requirements.
Understanding Your Options
You may well already be familiar with the organization and nature of a private, for-profit corporation. A foundation established as a not-for-profit corporation functions similarly, with the key exception that while for-profit corporations answer to their shareholders, not-for-profit corporate foundations are responsible to their members. These members are responsible for appointing directors and officers who will carry out the day-to-day operations of the foundation.
Corporate foundations are formed in much the same manner as for-profit corporations: via a certificate of incorporation filed with the requisite secretary of state. The IRS requires foundations to have a statement that dedicates the organization exclusively to charitable purposes. To fulfill this mandate, many foundations adopt the broad statutory language that defines all nonprofits (e.g., “for religious, scientific, literary, educational, or other charitable purposes.”) Having a broadly defined charitable purpose makes a foundation formed as a corporation flexible and responsive to its donor’s wishes.
Whereas a not-for-profit corporate foundation is established by a donor and managed by its members and their subordinates, a trust is established by a donor who makes a gift to one or more trustees. These trustees perform the trust’s day-to-day functions in service of its charitable purpose, which is defined when the trust is first established (registration rules vary by state, but usually trusts are registered in the donor’s home state). Trusts’ charitable purposes tend to be far more strictly and narrowly defined, making them much harder to change over time.
The most significant difference between corporations and trusts has to do with whom each ultimately benefits. While both serve the public good as inherently charitable institutions, a corporation’s true stakeholders are its members. In contrast, a trust has a fiduciary responsibility to its beneficiaries, namely the foundation’s grantees.