The Pros and Cons of Starting a Private Foundation

A private foundation is one type of nonprofit organization that typically makes grants to public charities and doesn’t provide programs of its own. Often funded by a person, married couple, family, or corporation, foundations enjoy tax-exempt status as long as they meet certain state and federal requirements. You may set up a private foundation as a not-for-profit corporation or a trust and then invest its funds in order to generate income for grants as well as to support the foundation.

Foundations require a substantial amount of time, work, and money to establish and maintain. While it’s much easier to write a check to a charity you’d like to support, starting your own private foundation does offer many benefits. Read on to learn about the key advantages and disadvantages associated with these organizations.

Starting a private foundation provides you with a range of benefits, including:

More Effective Philanthropy

If you just want to write a check and send it to your favorite charity, that’s a fairly quick and simple process. While you can easily donate to one organization this year and then to another the next, this approach doesn’t require you to keep track or have a formal plan. In contrast, foundations provide a more organized, strategic, and targeted way of giving. They encourage founders to carefully determine how they want to use their resources to make a positive impact and then implement a practical plan to achieve that goal.

Expanded Giving Opportunities

Foundations provide more options in terms of how — and to whom — you may give your charitable contributions. An individual cannot claim tax deductions on a donation to another individual, foreign nonprofit, or a non-charitable organization. However, foundations may make grants to such recipients just like public charities. That means if you donate to your foundation, your foundation can then give grants to this wider net of recipients.

Greater Financial Control

With a private foundation, the founding individual, family, or corporation maintains financial control because this small group of donors provides the nonprofit’s funding. In contrast, a public charity depends on public support and its board of directors or trustees to make decisions.

Tax Incentives

Like public charities, private foundations benefit from four major tax incentives in order to encourage charitable giving. Those incentives include:

• Income Tax Deductions: Private foundation donors can claim tax deductions on both their federal and state tax returns. Donors may deduct the value of cash donations up to 30% of their adjusted gross income (AGI) as well as the value of appreciated property up to 20% of their AGI.
• Tax-Free Asset Growth: All investment returns — whether from interest, dividends, capital gains, or other forms of investment returns — remain tax-free if earned within a foundation.
• No Gift or Estate Taxes: Generally, assets transferred to family foundations are not subject to gift or estate taxes.
• Double Capital Gains Benefits: Because foundations invest all donor contributions, those donors may claim a charitable deduction for the full market value of appreciated stocks held in publicly traded companies. Furthermore, as property owned by a foundation increases in value that added value doesn’t count as a capital gain and so doesn’t incur a capital gains tax.

Consistency in Giving

Many people start private foundations because they want a consistent way to support their favorite charities. Foundations also enable them to continue giving even after they’re gone.

Reasonable Compensation for Your Services

While members of a public charity’s board of directors can’t receive compensation for their work, a foundation’s board members or trustees can receive reasonable compensation for services rendered to the foundation under normal circumstances.

Reimbursement of Travel and Other Expenses

A foundation’s board of directors, trustees, and founding family members may receive reimbursement for reasonable and direct costs of services rendered to the foundation. If you must travel to your foundation’s board meetings, for example, you can receive reimbursement for your travel expenses.

Stronger Public and Community Relationships

Foundations can create strong, well-recognized relationships throughout the community and with the general public. For example, Bill and Melinda Gates are well-known for their business leadership. However, their work with the Bill & Melinda Gates Foundation further elevates their public image and community relationships because people recognize all the good they do for the community. Heightened public recognition also can help foundations bring more attention to a specific cause.

Enhanced Privacy

Foundations make it easy for people who regularly receive requests for charitable donations and fundraising appeals to refer all such inquiries to their foundation. This can prove especially beneficial in protecting the privacy of a high-profile figure.

Legacy Opportunities

Private foundations can provide a great way to leave a legacy — or to honor a friend or family member — by supporting a cause important to you or your loved ones. Because most founders set up private foundations to operate in perpetuity, this type of nonprofit enables them to continue supporting a cause indefinitely. Family foundations, in particular, help donors engage generations of family members in a specific cause or charitable effort, deepening their social consciousness and creating a true family legacy.

Greater Freedom to Take Action

Private foundations do more than simply enable founders to leave legacies and gain tax benefits. They also allow founders to create organizations that address specific needs in specific ways they deem appropriate. That means you can take risks and pursue actions that others — even the government — can’t or won’t do.

A foundation is the base of a home that supports the main structure while protecting against moisture, frost heaves, pests, and more. Without a foundation, a home might start sinking into the ground or be damaged by accumulated rainwater, sleet, ice, insects, rodents, or other pests.

Types of Foundations

The foundation is an essential part of a home. However, not every home has the same type of foundation. Some types are common, like poured concrete, while others, such as stone and wood, have become less popular as construction techniques have improved. Use this guide to learn more about the 9 types of foundations and the pros and cons of each.

1. Full Basement

One of the most popular choices for a foundation is a full basement. This type of foundation typically uses concrete to create a base and tall walls that measure at least 8 feet in height. A basement foundation is usually mostly underground, providing a base for the home and extra living space for the residents.

Expect to see many homes with basement foundations in colder climates because the deep footing of a full basement is often required to manage frost heaves and other freezing conditions. Basements also hold back the surrounding soil and groundwater, giving homeowners a dry space to store holiday decorations, tools, and other items. However, basement foundations are the most expensive option to build and maintain.

Pros

• Additional space
  
• Protection during extreme weather
  
• Windows and doors may be added for natural lighting
  
• Increases the value of the home
  

Cons

• Costly to build and maintain
  
• Expensive to repair
  
• Water intrusion or flooding may occur during severe weather
  
• Moisture control is necessary
  

2. Daylight Basement

Another type of basement foundation is a daylight basement. Instead of having most of the basement underground, a daylight basement often has one or more sides completely embedded in the ground from floor to ceiling while the other sides are exposed. This style of basement foundation is ideal for a split residence with a separate basement apartment because the foundation design allows for the installation of exterior stairs, windows, and a door.

The increased natural light and airflow also help to reduce the risk of mold growth, but the exposed foundation may be vulnerable to leaks or flooding. Additionally, a daylight basement is one of the most expensive foundation options to install and repair, so it might not be the right choice for a new home-building project on a tight budget.

Pros

• Increased space
  
• Private access to the basement
• Windows and doors let in natural light and fresh air
  
• Basement apartment rental opportunity
  

Cons

• More maintenance than other foundation options
  
• Costly installation and repair
  
• Risk of leaks or flooding during severe weather
  

3. Crawl Space

Crawl space foundations are similar to basements in that they typically consist of poured concrete walls that rest on deep footings for stability and to anchor the home. However, crawl space walls are generally no more than 8 feet in height, with most measuring just 2 or 3 feet tall, depending on the slope of the ground around the home.

A crawl space may have a concrete floor or be left with a bare earth floor. Residents can crawl into this area to access pipes, electrical connections, gas connections, and other home systems, though it's rarely a pleasant area to enter. Crawl spaces are less costly than basement foundations, although they still require excavation to build.

Pros

• More affordable than basement foundations
• Deep footings anchor the home against frost heaves and freezing conditions
• Increases space for mechanicals or storage

Cons

• Costs more than slab-on-grade or poured concrete foundations
• Requires excavation to build
• Moisture and pest issues are possible
  

4. Slab-on-Grade

Slab-on-grade is a basic style of foundation. This type of foundation is the easiest and fastest to construct, consisting of a single concrete slab that typically measures about 4 to 8 feet in thickness. The installers put in temporary forms to hold the concrete as the slab sets. Once the slab is dry, cured, and set, the forms are removed, and the main structure can be built on the foundation.

This type of foundation is more commonly used in warm to moderate climates that don't experience long periods of freezing temperatures. Slab-on-grade foundations are also popular for garages, workshops, or small sheds because they can be installed at a low cost by experienced DIYers. However, this type of foundation is not the best choice for colder areas because frost heaves can shift or crack the slab.

Pros

• Low-cost foundation
• Fast construction process
• Suitable for warm climates 
• Minimal maintenance requirements

Cons

• Not suitable for use in cold-weather climates
• Embedded mechanical systems are difficult to repair
• No additional lower-level living space
  

5. Poured Concrete

Poured concrete is the most common material used to make residential foundations. It's seen in full basement, daylight basement, crawl space, and slab-on-grade foundations. This is due to the high versatility, durability, and resistances of concrete as a construction material.

A poured concrete foundation can typically be used in almost any climate zone. However, the installers need to excavate and install foundation footings to anchor it to the ground and provide protection against frost heave or soil movement. Since the concrete pour is complete in one nonstop step, the finished result is a seamless wall or base of solid concrete that acts as a support and protective barrier for the home.

Pros

• High versatility and customizability
• Resistant to frost heaves and freezing conditions
• Seamless construction has minimal weak points
• More durable than standard concrete block installations

Cons

• May require rebar or other reinforcement
• Excavation and solid footing are necessary
• Weather can delay concrete-pouring time
• Temporary forms must be built before concrete is poured
  

6. Pier and Beam

When the home is located near a large body of water, like the ocean, a large lake, or a broad river, flooding can be a constant threat. With this in mind, pier and beam foundations are designed to elevate the house above the flood levels to protect the home during severe weather.

Pier and beam foundations are made with sturdy wooden or concrete piles or piers that support broad beam structures to form the base of the house. This type of foundation is also good for use in sloped areas, although heavy machinery is required to drive the piers deep into the soil for firm structural support. Additionally, the piers and beams may be susceptible to weakening and wood rot, so they require regular inspections and may need frequent repairs.

Pros

• Protects from flooding
  
• Does not require significant excavation for installation
  
• Good for use in sloped areas or coastal locations
  
• Easy access to all sides of the home
  

Cons

• Heavy machinery is required for construction
  
• No additional storage space
  
• Wood piers and beams can be prone to rot 
  

7. Insulated Concrete Form (ICF)

When it comes to foundation materials, poured concrete is the most common, but home builders may also choose to use insulated concrete forms (ICF) to create the foundation. An ICF foundation is made up of insulated forms that contain poured concrete. Unlike with a poured concrete foundation, the forms remain in place after the concrete cures.

ICF foundations are quickly becoming a popular option due to the high energy-efficiency ratings this type of material offers. Additionally, ICF foundations are well-equipped to resist moisture and pest infestations while boasting a durability level that matches poured concrete.

Pros

• Insulating layers are permanent
• Forms don't need to be dismantled or removed
• Highly resistant to moisture and pests
• Durable against frost heave and freezing conditions

Cons

• High price for installation
• Requires extensive excavation
• Not all companies offer this type of foundation
  

8. Stone

Not so long ago, stone foundations were one of the more popular choices for the base of a home. Homeowners with houses built over a century ago may still have a foundation of natural stone instead of poured concrete or concrete blocks.

This type of foundation can be more attractive than plain poured concrete, but these structures are prone to water and pest infestations. Additionally, the maintenance of a stone foundation can be more costly than a standard concrete foundation. Despite these drawbacks, stone foundations may increase the value of the home, depending on the condition of the foundation.

Pros

• Unique aesthetic appeal
• Long-lasting and durable
• May increase property value under the right conditions

Cons

• Frequent maintenance is required to keep mortar in good condition
• Vulnerable to water and pest instruction
• Expensive to repair
  

9. Pressure-Treated Wood

While pressure-treated wood foundations (PWF) are not common in most of the country, this type of foundation is well-suited for remote areas where it can get too cold to make concrete foundations practical. Chemically treated lumber is used to build the foundation of the home instead of using stone, concrete blocks, or poured concrete.

Pressure-treated wood isn't as durable as concrete, but due to the fibrous nature of wood, this type of foundation is more resistant to extreme cold, frost heaves, and other freezing conditions. Additionally, the wood is used to elevate the home off the ground, which helps protect the house from water damage and pest infestations.

Pros

• Energy-efficient with proper construction
• Relatively long-lasting
• Easier to use in extremely cold or remote locations
• Environmentally friendly

Cons

• Vulnerable to rot and water damage
• Improperly treated wood is at risk of insect damage
• Time-consuming to construct
  

Factors to Consider When Selecting a Foundation

Consider the average temperature, humidity, and climate when choosing a foundation type. Full basements and crawl spaces are good for colder climates, while slab-on-grade and pier and beam foundations are better for warmer locations. The durability and resistances of the foundation material should also be factored in when deciding on the right foundation.

Concrete and stone are highly durable and resistant to water and pest infestations, but these materials come at a higher cost and may require more frequent maintenance than a wood foundation. Similarly, ICF foundations are one of the best choices for durability, resistance, and energy efficiency, but this material typically costs more than any other type of foundation.

There are many factors to consider when deciding on the right foundation for a new home. Homeowners should work with home builders to discuss the strengths and weaknesses of each foundation option. Professionals will be able to assess the location of the home and provide clear advice on how to proceed.