What Is a Community Foundation? Definition, Pros and Cons, and How They Work

It’s an old adage that charity begins at home.

Of all the kinds of charitable organizations, the community foundation perhaps best illustrates this. Community foundations are grantmakers that serve a defined area—such as a city, county, or state— and draw their funding from multiple sources, be they individuals, families, or businesses.

According to the Council on Foundations, there are more than 900 community foundations across the United States, making a positive impact in communities of all sizes.

What Programs Are Offered by Community Foundations?

Community foundations serve diverse communities and, appropriately, often offer a diverse array of programs. The following are just some of the programs that might be on the menu of a community foundation. The ones listed here are diverse, but all have the same purpose—helping local donors get the most out of their donations under the auspices of the community foundation.

Grants

Grants are a simple way for community foundations to work with local partners to help support community needs in a tangible way. The community foundation partners with a local nonprofit that aligns with their current goals and provides grants for a specific charitable purpose—whether education, social services, healthcare, or the arts. This enables the local community’s wealth to be funneled through the expertise of a specific nonprofit grantee. 

Scholarship Programs

Local community foundations are often a source for student scholarship funds. By helping deserving students to pay their way through college, the community is investing in its own future, and making education more accessible to all. 

Donor-Advised Funds (DAFs)

A donor-advised fund (DAF) is a method to make giving to the community foundation simpler for individuals and families. This kind of charitable giving vehicle is increasingly popular due to its simplicity. By giving money to the charitable fund, the donor immediately receives a tax deduction. At the same time, donors can recommend grants from the fund over time, letting them have a say in the charitable process. DAFs are built on convenience—a donor can give money to them when they have the opportunity, deciding later what grants to recommend, and the money can accumulate in a tax-free fund. 

Community Leadership Initiatives 

Community foundations work as more than a hub for charitable donations. In many cases they can take on a proactive leadership role in tackling local issues. After all, who knows the struggles of a community better than that community? Initiatives can bring research, stakeholder meetings, and policy advocacy to bear on a variety of social, economic, and environmental problems. 

Field of Interest Funds

The field of interest fund is a fairly self-explanatory charitable giving vehicle. Donors establish this type of fund to support a particular area of interest—simple as that! The community foundation then manages the fund, distributing grants as they see fit within that field. This lets donors ensure their money generally goes where they want it to go, while relying on the expertise of the community foundation for the specifics. 

Capacity Building Programs

Capacity-building programs are a method by which a community foundation can improve the versatility and capabilities of nonprofits within their region. This generally comes in the form of providing training, workshops, technical assistance, grants, and other resources to help nonprofits improve their effectiveness. In the long-term, the goal is to help these nonprofits become more self-sustaining. 

Endowment Funds

Endowment funds, or legacy funds, are designed to aid in the long-term goals of a community foundation. An endowment is a permanent fund, maintained by an investment. The dividends of this investment are then used to fund grants. Often a permanent endowment is created by an individual or family, or in their memory. A community foundation can take on the task of maintaining an endowment designed to benefit said community, ensuring that financial support continues into the future. 

Collaborative Funding Initiative

In some instances, it’s useful for a community foundation to partner with another grantmaker, such as a private foundation, a government agency, or even a corporation. This kind of partnership is ideal when the specific challenge being targeted outstrips the capability of the community to tackle on its own. This could include widespread concerns such as public health crises or climate change. 

Impact Investing

You may have heard of the term “impact investing” if you’ve worked anywhere near the nonprofit space. This form of investing isn’t just about getting financial returns, but also creating positive change at the same time. Community foundations can use their resources to invest in ventures that align with their stated mission and benefit their local region. 

Differences Between Community and Private Foundations

It’s important to note that while there can be some overlap in purpose, community foundations and private foundations are distinct. Also essential is the fact that to the IRS they are considered separate entities and have other significant differences in their actual operations. Here’s a quick rundown of these key differences.

Governing Body

• Community foundations are run by an advisory community, or board of directors, which makes the final decision on important choices, with input from donors and professional advisors.
• Private foundations are an independent charitable organization created and controlled by an individual, family, or business. A private foundation maintains its own set of bylaws and is managed by its own trustees or directors. 

IRS Charitable Status

• A community foundation is classified as a public charity, under 501(c)(3) and 509 (a)(1) for the purposes of taxes and regulation.
• A private foundation is classified as a private charity under 501(c)(3) for the purposes of taxes and regulation. 

Excise Tax

• A community foundation has no excise tax on investment income.
• A private foundation is subject to a 1-2% excise tax on investment income and capital gains. 

Pros & Cons of Community Foundations

Pros of community foundations include:

• The Local Touch: No one understands community problems better than that same community. A community foundation is, by its definition, well positioned to be attuned to the needs of its specific locale. The foundation can also build uniquely strong bonds with local partners and community leaders. 
• Flexibility for Donors: Another perk for donors is the flexibility offered by a community foundation. Donors can give anonymously, designate fields of interest, or create donor-advised funds, all overseen by the foundation. This allows donors to feel like they have more control over their philanthropy. 
• Flexibility for Charities: The community foundation itself is well-positioned to work with a wide range of partners. Within the geographical area the foundation serves, the only limitation is ambition. This allows a community foundation to react to the needs of that community, giving to local partners that are most in need. 

Cons of community foundations include:

• Fees: It can be a boon for donors that the administrators of the community foundation handle all the complex work for them. However, no work comes for free, and this means the accumulation of administrative costs, which can cut into the final share for donations.
• Dependence on the Few: It is true that community foundations provide an excellent level of flexibility for donors, letting them donate how they want, to their field of interests. But at the end of the day, it is the board members of the community foundation that calls the shots. This can lead to tension if the leadership is seen as not being receptive to the needs of the community, or only representing a portion of it. 
• Limits of Control: The flexibility afforded donors through a community foundation is a certain draw. But in the long term, donors have less control over their donations compared to a private fund. The reason for this is that legally, after the donation is made, the community foundation has control over those funds. Donors can certainly make suggestions, but in the end, the final say is out of their control, which may cause trust issues.

How to Donate to a Community Foundation

Generally, a community foundation can walk you through the process of donating. This will either be to an existing fund, or a newly created fund. In broad terms, this is generally a simple process, often only requiring an agreement that outlines the fund’s purpose. If you’re unsure of where to donate, the community foundation itself will have the expertise to help you identify a high-impact local cause.
Exactly how you can donate will depend on the community foundation in question. But you can expect to be able to donate either in cash or appreciated securities. Some community foundations might also accept real estate, business interests, or other charitable gifts depending on their needs. 

Vetting a U.S. Community Foundation

The hope of the donor is that their charitable contributions are making a real difference in the quality of life of their community. If you need help with this process, you can visit Charity Navigator and the Community Foundations National Standards association to learn more about your local community foundations.