The type of foundation is not one-size-fits-all. The type of foundation matters when designing programs, designing compliance, and allocating funds. The most common mistake is the mix-up between operating foundations and private foundations. These two types of foundations are 501(c)(3) organizations with long-term objectives, yet they are quite different in terms of how funds are spent, the impact, and the operations.
The differences between the two types of foundations will enable the foundations to choose the right structure, set the right granting strategy, and choose the right technology, such as grant management software, which will be suitable for the whole industry.
How Foundations Are Classified
Generally, foundations are classified in the following categories:
- Where the funds originate
- What the foundations use the funds for
- Whether the foundations operate their own programs or grant funds to others
The classification of foundations has significant implications for the operations and the work of the foundations.
The most widely used category for foundations is the private foundation category. However, the private category has its own types, such as operating foundations. Thus, the best way to view operating foundations is as a subset of private foundations.
The Difference Between An Operating Foundation And A Private One
A private foundation, which is grantmaking, primarily makes grants. It has its funds sourced from one or few sources, invests the funds, and then makes grants to others to carry on charity work. The impact comes from the organizations or individuals the private foundations grant the funds to.
An operating foundation, on the other hand, is a private foundation, yet its main activity is running its own programs instead of making grants. Thus, the funds are more focused on the operations of the foundations themselves. Some operating foundations may also be making grants, yet the main activity of the operating foundations is running their own programs.
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Category
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Operating Foundation
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Private Foundation (Grantmaking)
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Primary Method of Impact
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Runs programs directly
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Funds external organizations or individuals
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Where Most Dollars Go
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Internal program costs (staff, facilities, delivery)
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Grants, payments, and grantee support
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Day-to-Day Focus
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Program execution, measurement, internal controls
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Intake, review, approvals, payments, reporting
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Typical Reporting Emphasis
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Internal program outcomes and cost justification
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Grantee outcomes, allowable costs, and compliance
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Grantmaking Role
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Grantmaking is often a secondary or complementary activity
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Grantmaking is a primary mechanism to deliver impact
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The Legal Differences
The legal differences are based on how a foundation uses its resources and measures charitable activity. Private foundations are required to abide by laws regarding reporting, governance, and minimum distributions. Operating foundations are required to meet special criteria to meet IRS guidelines to be considered an “operating” foundation.
Practically, this legal difference means that a foundation must demonstrate its activities and spending in a way that meets IRS guidelines and charitable purpose. An operating foundation would require a higher level of documentation regarding its activities and delivery of programs, whereas a grantmaking private foundation would require a high level of documentation regarding grantee information, payment, and compliance regarding work done by a third party.
Examples Of Both
Private Foundations (Grantmaking)
- Family Foundations that provide grants to programs and general operating grants to nonprofits
- Corporate Private Foundations that provide awards to programs and causes that align with a company’s giving priorities
- Independent Foundations that provide multi-year programs to external partners
Operating Foundations
- Foundations that run museums, archives, or cultural programs as a main charitable activity
- Foundations that run in-house research centers, labs, or direct research programs
- Direct service foundations that operate education, health, and community programs with internal staff and facilities
Can You Convert One to the Other?
In some cases, a foundation may change from one type to another over time, but it is not a matter of simply changing communications and budgets. There are potential structural changes that could be involved in a conversion from one type of foundation to another.
How Foundations Differ in Grantmaking Strategy
Grantmaking private foundations generally develop strategies based upon selecting good grantees, establishing funding priorities, and developing reporting that measures outcomes across a broad spectrum of external partners. The daily activity of a grantmaking private foundation is focused upon processing, reviewing, paying, and monitoring grants to external partners. For example, a grantmaking private foundation might issue an open RFP for a grant to support a “youth workforce readiness” initiative and then fund several external nonprofits to deliver services to youth in a specific geographic location. They would then review reports from grantees to inform all of their staff about outcomes for the entire initiative.
Operating foundations, in contrast, make grants to support their own internal programs. For example, they might make a grant to a partner to expand their own services, a grant to a university to support a study that informs their own programs, or a grant to a local organization to address a gap in services that they are unable to deliver themselves. In the case of a youth workforce readiness initiative, an operating foundation would operate the training program themselves and then make a grant to a community college to provide additional services to youth in the area, tying that grant to their own program schedule.
How Fluxx Can Help Both
While there are differences between operating foundations and grantmaking private foundations, there are also similarities. One of those is the need for clarity, control, and strong records. The day-to-day activities of an operating foundation and a private foundation are quite different, but both have similar requirements around applications, reviews, awards, and payments. For private foundations, there are also requirements around grants made to outside parties and ensuring those grants are aligned with internal program work and metrics.
Fluxx offers a system of record to track and manage all of this. This means that foundations can standardize processes, set up approvals, and define reporting requirements as active tasks rather than simply using their inbox as a reminder system. As their portfolio grows, they can also see at-a-glance what is in the pipeline, what is approved, and what is overdue.
Choosing The Model That Matches Your Mission
For those looking to become an operating foundation vs private foundation, it comes down to delivering impact through internal programs, external partners, or both. While there are classification and legal requirements, it is essential to understand the strategic implications as well.
As things become more complex, as they do with grants, reporting requirements, and compliance, it is much simpler to run a disciplined operation using a purpose-built system like Fluxx. Book a demo to see how much easier we can make it.
