# Cost of a Foundation

The Council on Foundations has developed three basic examples to help you decide whether you can afford paid staff. The scenarios below roughly demonstrate the relationship between asset amounts, grant distribution, and staffing expenses.

- You make grants and do not provide direct charitable services. - You want a permanent endowment. - Your charitable budget is going to be in the range of 5 to 6 percent of assets

The IRS mandated minimum annual charitable expenditure is 5 percent of assets. This includes grants and administrative expenses, but does not include investment management expenses. In the formulas below, we use the median foundation expenditure percentage of 5.5 percent for your charitable budget.

No more than 15 percent of your annual charitable budget will be used for administrative expenses. Research by the Council on Foundations shows that the median charitable administrative expense level in relation to the total charitable budget for all private foundations is 8.6 percent. However, smaller foundations don't have the same economies of scale as larger foundations. Therefore, for smaller foundations we suggest that you assume that administrative expenses will be about 15 percent of your annual charitable budget.

Annual legal and accounting fees will total \$5,000. Depending upon the assets you have available, you may want to think about alternatives that can help you maximize your charitable dollars and choices for giving (see the "Additional Options" section below).

# Example 1: \$1 Million Foundation (No Staff)

Because of the small amount of money that should be devoted to administrative expenses (usually no more than 15 percent of your annual charitable budget), the option of hiring part-time staff is not financially prudent with a foundation of this size.

Total Annual Charitable Budget

\$1,000,000 x .055 = \$55,000 Assets x 5.5 percent = total annual charitable budget (grants + expenses) Administrative Costs

\$55,000 x .15 = \$8,250 Total annual charitable budget x 15 percent = administrative budget Without paid staff, your administrative costs will reflect only your legal and accounting fees (estimated at \$5,000), which in this case is 9 percent of your annual charitable budget. Volunteer Responsibilities

Because in this scenario the foundation cannot realistically afford staff, it will be the responsibility of the donor and volunteer board to review all grant requests, go on site visits (as necessary), and handle all grantee correspondence, grantmaking investigations, and governance responsibilities of the foundation. If your grantmaking is focused and the grants are few in number, these responsibilities will be easier for you. These responsibilities can be extremely fulfilling when willingly undertaken. In preliminary responses to the Council's 2002 Foundation Management Survey, 93 percent of family foundation respondents reported that they feel inspired by their philanthropy.

# Example 2: \$5 Million Foundation (Half-time CEO)