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)

Council on Foundations research shows the majority of private foundations with assets of $5 million to $9.9 million have part-time staff only. The following calculations assume your half-time CEO salary and benefits are $38,7501 and your annual legal and accounting fees are $5,000: Total Annual Charitable Budget $5,000,000 x .055 = $275,000 Assets x 5.5 percent = total annual charitable budget (grants + expenses) Administrative Costs $275,000 x .15 = $41,250 Total annual charitable budget x 15 percent = administrative budget In this case, because your total charitable budget is significantly larger than the previous example, you might consider the option of a half-time staff person. With your half-time CEO salary and benefits at $38,750 and your legal and accounting costs at approximately $5,000, administrative costs total $43,750, which exceeds the recommended 15 percent administrative ceiling. Therefore, you might consider hiring a lower-compensated staff person such as a program officer or administrative assistant, with the board retaining many responsibilities, or hiring a CEO with legal or accounting skills so that the $5,000 fee is reduced. Example 3: $10 Million Foundation (Half-Time CEO and Half-Time Administrative Assistant) In this case, your annual charitable budget is an amount that realistically allows you to consider the option of hiring a half-time CEO and a half-time administrative assistant. Assuming that your half-time CEO and half-time administrative assistant salary/benefits are $68,7502 and your annual legal and accounting fees are $5,000: Total Annual Charitable Budget $10,000,000 x .055 = $550,000 Assets x 5.5 percent = total annual charitable budget (grants + expenses) Administrative Costs $550,000 x .15 = $82,500 Total annual charitable budget x 15 percent = administrative budget Adding personnel and legal and accounting costs gives you a total of $73,750 for administrative costs. In this example, your administrative costs will be 13.4 percent of your annual charitable budget, which is below the 15 percent recommended ceiling. As noted above, there are many options available to manage a private foundation. Our research indicates that many families opt for more than one philanthropic tool, each fulfilling a different goal. For example, in preliminary data from the 2002 Foundation Management Survey, 11 percent of the family foundations responding also had donor advised funds at community foundations. The costs related to starting a foundation on the state level will vary from one state to the next and depend on the type of structure (e.g., trust or corporation, public charity, or private foundation) chosen for the foundation. State fees are paid with submission of required documents to the state office that is responsible for regulating charities; usually this is the secretary of state or the attorney general’s office. In addition, there are fees associated with seeking recognition of charity status with the IRS. Finally, there may be licensing or other fees required for operation of any business in a particular area.

# See also