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Foundation Equals Self-Help

by Martha L. "Marty" Leibhart


Community or county foundations can help plug the local monetary gap as federal and state funds continue to shrink. The foundation can help provide financial support for community development efforts and assist charitable organizations. The money stays within the community and supplies funds for improvements and repairs that otherwise fail to happen when tax monies and other government funds are not available. In the long term, a foundation provides some assurance that improvements can be made, making a more attractive quality of life for its community residents.

A community or county foundation also can have a positive influence on bringing people together in a common cause. If a county foundation exists, all parts of the county and its communities benefit.

What is Community Foundation

A community foundation is a nonprofit organization that receives monetary contributions to be distributed in the form of grants to nonprofit organizations within the community.

In this publication, community means either an incorporated entity or an entire county. In most cases, distributions are made from the proceeds received from investment of the contributions.

The Internal Revenue Service specifies certain requirements for an entity to be defined as a foundation. The organization must name itself after the community/county it serves and make grants within that entity. The foundation must also have a governing board made up of various representative members of that community.

Creating Economic Opportunities

The qualifications and guidelines must be in accordance with Section 501 (C)(3) of the Internal Revenue Code of 1986 on Corporate Exemptions. Section 170 (C)(2) of the Internal Revenue Code refers to corporate contributions which are deductible.

Cash gifts by individuals are deductible for income tax purposes up to an annual limit of 50 percent of the donors' adjusted gross income for the year of the gift. Five carry-over years, if needed, are allowed.

Two Ways to Achieve Charitable Status

Community foundations can attain charitable status by the "mechanical test" or by the "facts and circumstances test." It is necessary to achieve charitable status by one of the two methods so contributions remain tax deductible to donors.

The mechanical test "allows a community foundation to obtain status if at least one-third of its support comes from public or government contributions every year." This often becomes a non-passing test because only 2 per-cent of the contributions to the foundation over a period of four years can be attributed to any one individual. As an example, if one person contributes a million dollars in a four-year period, only $20,000 can qualify as public support.

Under the "facts and circumstances test," a community only needs to show a minimum of 10 percent support from the public or government. The foundation must show it is a publicly supported entity.

To document that it is publicly supported, it can carry out a variety of activities. Examples of some of the documentation needed are public relation efforts to attract public support, preparation of annual reports and proof that the governing body is truly representative of the community and/or county.

Representative Governing Body

According to IRS definition, a governing body can be comprised of public officials or people having a specific skill or knowledge related to the foundation. Some foundations include home-makers, members from low income areas, as well as representatives of various organized groups. Basically, anyone representing the views of the community can be on the governing board.

Professionals Can Help

Many community foundations are run by volunteers. However, a foundation needs to have its assets managed to obtain maximum growth potential. A trust officer at a bank can help in making investment decisions. A trust officer also has contacts with people who may be potential contributors to the foundation. The trust officer or foundation manager should be able to manage the funds in relation to investment objectives, but the decisions about distribution of funds should remain with the foundation board.

A lawyer should be retained when writing bylaws and setting up the foundation. Correct wording of Articles of Incorporation, bylaws and setting up the foundation so it stays within the legal description is important. However, the bylaws and how they are set up still remain the board's re-sponsibility.

A certified public account ant is another important professional necessary in setting up guidelines. Staying within the tax laws and making sure that donations are handled and distributed according to IRS statutes is a primary task that an accountant can help the board with.

Cost of a Community Foundation

Communities, no matter how big or small, will incur some costs. Articles of Incorporation must be filed with the state, resulting in a filing charge. Appropriate tax forms and status also must be obtained. Legal work, services of an accountant, and fees to manage the funds through a financial institution are some immediate costs that may result.

In some communities, professionals and financial institutions may volunteer their services as part of their contribution. In other situations, some or all fees must be paid up front when the foundation is being established.

Financial institutions have various procedures or rules in dealing with foundations. Some donate their services to the community. Others require a service fee, a percentage of the monies that are placed in their institution. This fee can range from percent of the assets held in the institution by the foundation. Other institutions require a standard dollar amount, while others figure the fee on a prorated schedule, based on the amount held and invested for the foundation.

Obviously, a foundation needs someone to deal with the daily routine tasks of running a foundation. A volunteer(s) from the community may be able to handle the tasks, particularly in the beginning stages, or if the foundation is small. In other situations, however, the board may determine that a hired professional staff is necessary to attain the desired results. Many boards hire a professional staff to handle fundraising, daily operations, personal contacts with potential donors and publicity campaigns. Large foundations also may retain or hire a lawyer and a certified public accountant.

Obviously, having a full-time staff with a full-time job of working for a community foundation should result in continued support. However, small communities may not have enough money for a paid staff, particularly in the beginning. In this case, fundraisers, bake sales, publicity campaigns and the support of local organizations can help develop the financial basis for starting a foundation. In small communities, these efforts can bring people closer and allow everyone to contribute and take ownership for its success.

Defining a Foundation

Over the years concerns have arisen that may cause difficulty on how various gifts can be handled in a foundation. Answering these questions and setting policies for many situations in advance will help the organization run more smoothly. Here are several concerns that should be addressed before setting up the foundation.

Acceptable Gifts

Most gifts come with good intentions. However, over a period of time, the cost of maintenance or management may become a burden rather than a help. Criteria should be setup to cover this. An example would be the cost of managing a stock portfolio outweighing the income. Another example would be leaving a building as a gift, where the cost of maintenance and utilities becomes a burden.

In some situations, those who donate monies to a foundation want to earmark it toward a specific group or area, such as a senior citizen center or park. Again the board, when forming the foundation, needs to decide if it wants to keep the money in a general fund or if the major portion or all of it can be given for specific purposes.

The positive in this situation is that at least part of the money can go toward a specific need in the community. On the other side, an area that really needs funding may go begging because all funds have been earmarked. The foundation becomes an organization to run money through and defeats the purpose of serving many community needs.

Initiators should consider whether they will accept gifts that have all or a portion of the gift going to another entity already having a foundation.

Generally, if the donor gives a portion of the gift to such an entity and the community foundation is the primary receiver, it is acceptable to receive the gift.

Giving Grants

Policies should be written and specific guidelines drawn up through the bylaws as to how, to whom, and under what circumstances money will be granted. A foundation may grant money to more than one nonprofit organization. With several organizations competing for grants, criteria need to be established to select the most beneficial projects in the community. In some situations, the number of volunteer hours and matching money may be used. In other situations, cost-effective proposals and designs may be needed.

In addition, when giving grants, guidelines that are enforced help to eliminate discrimination and back those projects that are most cost-effective or needed. A solid record is also established as to why one group received a grant while another group did not. All groups need to have a clearly stated written proposal when asking for a grant.

Keeping the Economic Base

The board, keeping in perspective the Internal Revenue Code, should determine how much principal must be maintained to continue building interest. Perhaps a portion of the interest may be distributed. Or a community/county foundation may need to reach a target amount to generate enough interest before distributing grants. Overtime, these amounts may need to change. Bylaws should reflect the amount of principal kept as a base and how much interest is to be granted. Foundations should distribute grants based on the amounts they actually have rather than basing decisions on potential income that may not be received.

Conflict of Interest

In some communities, especially smaller ones, conflict of interest may arise. A board member could be the direct or indirect receiver of a grant. An example would be improving a sidewalk where a board member owns a cement plant and would receive income.

This issue should be addressed within the organization's bylaws. There are two schools of thought in dealing with this concern. Some bylaws state that if a community foundation board member or contributor benefits from the foundation directly or indirectly, this should not preclude them from voting on the distribution of the grant.

Conversely, the purpose of a foundation is to make the community better for everyone. In addition, those who have businesses within that community should be awarded the contract in order to keep the money within the community and promote local businesses. A bid process might be used. As long as the contract is given honestly and fairly there is nothing wrong. It must be emphasized that this decision needs to be made in the beginning as the organization is set up.

The conflict issue may not be a problem if only one business exists in a particular area. However, if five businesses are involved and the jobs are awarded to board members only, this may cause unwelcome conflict and ridicule and taint the entire board's reputation.

Variance of Power

A "variance of power" clause should be included in the establishment of a foundation. This clause allows the transfer of foundation funds, if necessary, to another organized entity with a similar purpose if the original purpose of the foundation no longer exists.

An example would be a foundation established to help WWI Veterans. Eventually, WWI Veterans will not exist, but the funds could be transferred to WWII Veterans. The "Variance of Power" clause can allow the transfer of funds without having to go through a long, costly court procedure.

Potential Contributors

Publicity about the foundation is probably one of the best ways to make residents aware of its existence. Potential donors can be anyone from someone contributing $5, to a fund raising campaign, to those making substantial donations.

Many foundations have been established simply by doing fundraising campaigns, soliciting donations from individuals and having local events with proceeds donated to foundations.

Businesses, corporations and financial institutions often contribute to community foundations. This is their way of addressing their civic responsibility to the welfare and quality of life that the community contributes to their employees.

The board should certainly make attorneys, bankers, accountants and others dealing in financial matters aware of the foundation, since these professionals may be asked about leaving money or property to a worthy organization. Alert funeral directors, too, because people often want a memorial established for loved ones.

Recognition of Donors

Many individuals, corporations, etc., contribute to foundations without expecting recognition. However, recognizing contributors with formal thank yous, publishing donors' names or using other recognition, shows appreciation. This also helps to give the foundation credibility when others see that their neighbors and residents have supported it.

Communities can be innovative in their recognition. Some have had special bricks made with the donors' name on them and use them to pave a park area. Others plant trees in their honor, place names on plaques, or give out recognition certificates. Unless the donor wishes to remain anonymous, a little recognition goes a long way.

In Summary

A community/county foundation is one tool which can meet expenses, needs or repairs and make improvements in the face of shrinking local, state and federal revenues. The foundation also serves as a vehicle for people wanting to donate money to a community without personal expense. It is a fund where the person who wants to contribute, but does not have large amounts of money, can give and feel some ownership and pride in the community/county. Everyone can be a part of helping the community/county grow.

References

The following material provided background for this publication and could be helpful for those interested in starting a foundation.

Community Foundations Responding Today, Investing for Tomorrow, Council on Foundations, 1828 L Street, N.W., Suite 1200, Washington , D.C. 20036.

Community Foundations, A Growing Movement in Philanthropy Has Sprouted From a Long Dormant Idea: Foundations of, by and for Local Communities, Jack Shakely, Reprinted from The Grantsmanship Center News, 1976, The Grantsmanship Center.

The Lincoln Foundation - a community trust, The Lincoln Foundation, Inc., 215 Centennial Mall South Lincoln, Nebraska 68508.

Lincoln Foundation, Inc., A Guide to Effective Giving, The Lincoln Foundation, 215 Centennial Mall South, Lincoln, Nebraska 68508.

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About the Author:

Martha L. "Marty" Leibhart
Extension Specialist
Community Development, Northwest
COOPERATIVE EXTENSION SERVICE, MANHATTAN, KANSAS



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