Setting Up Your Administration
At bare minimum, here are the things a private foundation must do every year in order to remain a private foundation and stay out of trouble:
- Pay your annual excise tax of 2% (or 1% in certain cases) of the foundation’s net investment income through quarterly estimated payments.
- File your federal tax returns, and comply with state filing rules.
- Meet your annual minimum distribution requirement (5% payout) through grants and administrative expenses.
- Follow public disclosure rules which require foundations to make certain documents available for public inspection, including the 990-PF, the 990-T, the 1023 and all related correspondence.
- Uphold all laws relevant to private foundations, including avoiding the following activities:
- Acts of self-dealing
- Excess business holdings held past an allowable time period
- Imprudent investment decisions
- Making prohibited expenditures or permitted expenditures without following IRS-specified rules
- In addition, private foundations are subject to state laws.
Learn more in Legal Essentials for Small Foundations.
Office Space & Equipment
No. A trustee or family business renting space to their private foundation is considered an act of self-dealing—unless the space is leased to the foundation for free.
No. It is self-dealing for the foundation to pay for space owned by a family member or other disqualified person. A disqualified person is any trustee, foundation manager, substantial contributor to the foundation, or family member of any of the above, as well as certain related entities. There is no self-dealing, however, if the foundation leases space from a disqualified person for free. In addition, there is no self-dealing if a foundation that maintains space in a family office is able to arrange for a separate lease with an unrelated landlord.
A foundation that maintains space within the home or office of someone who is not a disqualified person—such as a hired manager—may pay reasonable rental costs, if structured correctly. Typically, the cost of renting the space should be built into the fee for services or salary as long as it is still reasonable. Only in the rare instance that the space is used exclusively for the foundation can the foundation pay rent to the person providing the space.
If your foundation operates as a small business with office space and equipment of any value, you may want to consider carrying a business owner policy or office package. Even foundations that operate out of a home office may want to consider this type of package as homeowners insurance may not cover it sufficiently. Business Property insurance protects the contents of your business against fire, theft, and other perils. There are many different types of property insurance and levels of coverage available. It’s important to determine the property you need to insure for the continuation of your business and the level of insurance you need to replace or rebuild.
Often coverages are combined into one “package” such as a Business Office Package Policy (BOP) where you can customize the package to cover only the things you need and want. Here are some tips when buying this type of insurance:
- Consider increasing your deductible to reduce your premium;
- Learn the difference between replacement cost, actual cash value, etc.
- A business office package policy may offer protection for items such as: buildings, leased or owned; owned furniture, equipment and supplies; leased equipment; inventory; losses from crime; valuable papers; “slip and fall” protection in case someone gets hurt on the premises (whether you own or are leasing space); and non-owned automobile liability.
For more information on insurance needs, see Protecting Your Small Foundation with Insurance.
Viruses and spyware are malicious programs designed to damage computer files or slow your access to the Internet. You can protect your system from these external threats by loading virus and spyware protection.
Backing up your computer is a vital part of your records management system. It’s easy to do—but for it to work, you need to make it a regular habit.
To back up your system, you will need hardware (the drive) and accompanying software. Most data storage systems today come prepackaged with software. If you have a small office, you can use a CD-R disk or a tape drive (which stores more data than a disk). It helps to use at least two sets of backup media (two CD-R disks, for example), alternating them in case one is destroyed. You can also purchase an external hard drive. Always keep back-up files away from your computer, including one set outside of your home or office.
For suggestions and hardware/software comparisons, visit Tech soup website, a technology website for nonprofits.
Can a foundation pay for utilities, etc., when using office space provided by a disqualified person?
A foundation may pay its fair share of utilities, maintenance, or insurance related to office space, so long as the payment is made directly to the vendor company—and not to the disqualified person. Typically, this is done only for items that are bigger or more simply divided, such as phone bills.
The following are general guidelines as to the records your foundation should keep, and for how long. Although the IRS had published a Compliance Guide for 501(c )(3) Tax-Exempt Organizations, which broadly addresses recordkeeping for nonprofits, there are no IRS rules on recordkeeping specific to foundations. Many ASF members have sought legal advice on recordkeeping, and received a range of recommendations.
If audited, these are suggestions of which records you should have on hand and how long you should keep them.
Keep the following documents permanently
Keep the originals of these documents in a secured, fireproof location, along with copies in your office. These include:
- Charter documents (articles of incorporation, trust instrument, bylaws, etc.), plus any amendments to these documents
- Form 1023, the formal application for federal tax-exempt status—keep a complete copy of the application along with all attachments and schedules
- Form SS-4, the application for taxpayer identification number
- IRS favorable determination letter, the IRS ruling that 501(c)(3) status is granted
Legal and Accounting Records
- All Forms 990, the foundation’s annual tax return—in addition, keep tax worksheets for up to ten years
- Any official correspondence with the IRS, including private letter rulings or audit findings
- Any other tax exemption certificates, for example, from state or local authorities
- Correspondence with attorneys, accountants and/or custodians of the foundation’s assets
- Property records, financial and insurance policies
- Records of contributions to a private foundation. These records will be necessary to determine private foundation excise taxes.
- Documentation for gifts of real property made to a community foundation.
- Signed meeting minutes
- Committee actions
- Annual reports
Keep these documents on hand for a certain period of time
Grant Records—7 years
- Grantee’s determination letter and verification
- Financial records
- Contribution correspondence and canceled check
- Matching gift records
- Letters of inquiry, grant applications and general correspondence can be kept for three years (Note: Although it is not required, some foundations keep a log of rejected proposals with notes on the reasons they did not fund the proposal.)
Personnel and Administration Records—7 years (generally)
Because different states have different laws regarding employment, check with your attorney or CPA to determine the required length of time to retain personnel records.
- Personnel records include applications, personnel files, time reports, unemployment claims, withholding, W-2 forms
- Foundation’s payment to employees
- Worker’s compensation policies and reports
- Records related to pension and retirement plans
Financial Records—7 years
- Bank statements and reconciliations
- Budget and expense reports
- Check requests and invoices
- Depreciation schedules
- General ledger and journal
- Annual summary of investments and securities
- Audit reports
- Contracts, leases and mortgages
- Investment manager reports—keep until the assets are sold (or otherwise disposed of) and for the duration of the audit period
- Record of transactions (e.g. a checkbook), gross receipts and canceled checks—keep for tax reporting and the audit period that follows
- Cash contributions to community foundations—keep until tax reporting is complete and the audit period has ended
- Gifts of securities to community foundations—keep until the securities are sold, the transaction is reported on the community foundation’s tax return and the audit period has ended
In addition, community foundations should also keep
Charitable solicitation records
Check with your attorney or the state attorney general on how long solicitation records must be kept for state purposes.
- Community foundations should record their efforts to comply with federal and state charitable solicitation laws (regarding the provision of goods and services to donors) until the audit period expires relating to the gift or solicitation campaign.
For more on this topic, visit the Store to order Keeping Good Records: Small Foundations’ Guide to Staying Organized.
A records retention policy is simply a written document—in one or two pages—that summarizes everything about your procedures for storing, organizing, purging, archiving, and protecting foundation documents and fulfilling public reporting requirements. Documenting these procedures helps your foundation keep good records over time, letting you reap the benefits of compact, organized, and secure files. A policy also makes it easier to respond to public requests for information, and prepare in the event of an audit.
A records retention policy typically includes the following information:
- What documents you store, and how long you store them;
- Where you store different types of documents—on-site, off-site, computer system, or archives;
- How you organize the documents into files—this helps people who file, purge, and archive to follow your established system, and helps people find specific documents quickly;
- Purging procedures—write down how often you will purge different paper and electronic files—recommended every three to six months ideally, or at least once a year;
- Archiving procedures—list what paper and electronic files you want to archive, how often, and where they will be stored;
- Protection procedures—list the important foundation documents to photocopy, with originals kept off-site; how you back up computer files, and how often (every one to two weeks is recommended); and how you protect your computer against viruses and spyware, and how often;
- Public reporting procedures—list what documents need to be shared, and how your foundation will share them for inspection, by request, and if you choose, via the Web;
- Lastly, who is responsible for performing all these tasks—filing, purging, archiving, protecting documents, and fulfilling public reporting requirements. Spell out whether one designated person will do all of these tasks, or if the tasks will be shared.
For more information, see ASF’s primer Keeping Good Records: Small Foundations’ Guide to Staying Organized.
A records system helps your foundation stay efficient and organized. It helps you fulfill the legal requirements regarding recordkeeping, and track progress toward your mission over the years. Plus it helps you save time when you are searching for important documents!
Here are other ways a records system works for you:
- Organizes and maintains clean and compact records;
- Catalogs documents for easy retrieval;
- Safeguards important documents;
- Helps you prepare to make grant decisions;
- Helps you prepare for board meetings;
- Creates an institutional memory relating to board decisions;
- Develops a history of grantmaking to assess how your program is fulfilling your mission;
- Creates an archive of proposals received, helping you develop a portrait of community needs;
- Helps you prepare for an audit;
- Protects tax status and preserve trustees’ limited personal liability;
- Helps train new trustees on the foundation’s background, grantmaking, policies, and procedures; and
- Preserves the foundation’s history.
It takes a little time to set up and maintain a records management system, but once you have it going, you will be efficient and organized. A records management system consists of the following tasks:
- Sorting your documents into categories;
- Organizing documents and setting up files so you can retrieve documents easily;
- Purging inactive documents regularly, to keep your files clean and compact;
- Archiving documents regularly that you no longer use but wish to keep for historical purposes; and
- Protecting your records.
Be sure to inform everyone at your foundation on procedures for keeping good records. Include a map of your files, your procedures for protecting records, procedures for reporting to the public, and who is responsible for all recordkeeping tasks.
Tip: Keep your written records retention policy on your file cabinet(s) and on the wall. If you are the sole administrator, it will help you file and retrieve documents. If there are other staff, it will help everyone at your foundation on the same page, and keep your documents safe over the months and years.
To develop a filing system, which is part of your overall records management system, first you will sort your documents into major categories that fit with your foundation’s operations. Foundations sort their documents in different ways; some foundations, for example, sort according to the following categories:
- Founding Documents
- Legal and Accounting Records
- Board Records
- Program Records
- Personnel Records
- Foundation Financial Records
- Historical Records (to create a Foundation Archive)
The goal is to sort all the documents you need to keep, and want to keep, into major categories like these, which will become the main organizing principles for your files.
Second, consider how you want to organize the documents within each of these major categories. Decide whether some of the categories might benefit from a set of subtopics. For example, the file Board Records could be organized into subtopics such as: Board Meeting Minutes, Board Lists, and Board Planning.
Then, consider ways of organizing the documents within each of these subtopics:
- By year
- By program area (if your foundation has more than one)
- Grants by region or by neighborhood
- Color-coded system
Different ways of organizing documents have different advantages. For example, organizing alphabetically might make retrieval easier in some cases, but organizing by year might make for a smoother transition when purging and archiving materials. In addition, different file categories might call for different ways of organizing. You might decide “Grantee Records” is best organized alphabetically by organization while “Grantseeker Records” is easier to use if organized by program focus area.
Finally, establish a separate, well-labeled file and location (even if it’s a cardboard box) for each of your document categories (Founding Documents, Board Records, etc.):
- Attach a simple cover sheet to each file, listing its contents and the date you created it. Dating your files will help you purge and archive them later;
- To quickly locate documents you use often, photocopy them onto color paper;
- Make file names consistent between hard copy (paper) and electronic (computer) versions;
- Explain your filing system in writing, save the explanation in your administrative files, and hang it on your wall. That way, trustees and staff can refer to it when filing and retrieving documents.
Set aside a separate, well-labeled file and location (even if it’s a cardboard box) for each type of paperwork so that it is easy to initially file, access when needed, and move to storage when not needed. Have a set time each year to create new files and move old files to storage. For instance, in the beginning of 2012, gather file folders of unfunded proposals for 2011, and put in a box clearly marked, “Declined 2011 Proposals—Disposal Date 1/2015.”
Other tips include:
- Only keep what you have to—for example, toss attachments to grant proposals that you don’t require, after the grant decision.
- Consider accepting letters of inquiry and proposals online.
- Convert your paper files to electronic files by scanning the documents and placing the information on CD’s, DVD’s, or a hard drive (have more than one electronic copy before throwing out the paper copy).
Purging keeps your files clean and compact, and saves you space and money.
As part of your records management system, you will want to decide which files (including e-mails) you will purge (destroy) regularly, and how often you will purge them. Some foundations pick an annual Purge Day, when trustees and/or staff file documents, review files, purge inactive documents, and archive records. It is helpful to purge every three to six months, but at least once a year.
Although there are costs to recordkeeping, it can save your foundation time, money, and frustration in the future. The board will find it easy to locate important documents, be able to better track progress toward its mission, and guard itself against possible fines for not complying with the law.
If the foundation keeps recordkeeping in-house, you can estimate it will take at least four to six hours per grantmaking cycle—counting the time to properly document grant files, keep meeting minutes, and review, purge, and archive old files as needed.
Your foundation might invest in office equipment such as additional file cabinets, a computer scanner, software to back up your electronic records, and also perhaps the rental of off-site storage. Some foundations rent a lock box at a bank for items you must file permanently.
The board is responsible for making sure the foundation’s records stay in good order, and that the foundation keeps important documents for the required amount of time.
Some small foundations delegate their recordkeeping to accountants, custodians, or consultants. This can be a good choice if your space is seriously limited, but there may be a downside—files are less accessible when you need them. Even if your board hires an outside recordkeeper, it is still ultimately responsible for overseeing the records management.
If your foundation does hire an outside recordkeeper, be sure to clarify the scope of the work, the fees and payment schedule, and your expectations (including where the records will be stored and how trustees will access them).
Some foundations build a history of their foundation by creating an archive—a long-term repository of foundation records. Archives can be valuable for your foundation’s successors, for scholars of philanthropy, and the public.
Archives include files with information about the foundation’s beginnings—its values, mission, and grant program, as well as its people—the founder(s), trustees, and any staff. By keeping an archive, you preserve your foundation’s (and in some cases, your family’s) history, and show how it evolved over time.
Archives typically include the following:
- Founding documents (articles of incorporation; trust documents, etc.)
- Permanent files
- Grant-related files
- Annual reports
- Board minutes
- Oral, written, or video histories and interviews
- Other videos
- Press clippings
- Significant correspondence
If your foundation is located in a home or small office, it can be difficult to find storage space to keep your records over time. Here are a couple of options:
- Scan your historic documents and store them electronically. You can store electronic files on a CD-R disk, a hard drive, external drive - or even the cloud. CD-R disks are cheap and durable, and they can be read in any machine with a CD-ROM drive. If you archive your documents electronically, make sure to create two sets of electronic copies, store them in more than one place, and back up your copies regularly.
- If you don’t have the space—or interest—in creating an archive yourself, consider donating your historical files to a local library, repository, or historical society. Most have tools to preserve your materials and can advise you on what is of historical value. For more information on where to donate your historical files, contact the Special Collections and Archives at Indiana University or the Society of American Archivists.
No one likes to think about disaster, yet the risk is always there. Fires, floods, or even the occasional employee or board member snafu can spell disaster if they lead to the loss or deletion of your important records. Here are a few steps to help you stay prepared:
- Photocopy your vital records, and store originals off-site;
- Back up computer files every one to two weeks; and
- Protect your computer from viruses and spyware—update your computer regularly with protection software.
There is little legal advice specific to recordkeeping after a foundation closes. According to best practice, however, financial and tax records should be kept for a minimum of 7 years after their filing dates. Other business records, such as pension plans and directors’ and officers’ liability insurance contracts, should be kept for a minimum of 10 years. Records such as board minutes, annual reports, contracts, bank statements, and financial reports can be kept on a discretionary basis—typically up to 10 years. It is recommended that personnel and property files be kept permanently.
Usually when a foundation closes, one board member or an accountant will keep the records, along with a schedule for when to purge (destroy) them. Although it isn’t a legal requirement to keep records such as financial and tax records permanently, a closing foundation might consider archiving them for historic value.
A paperless office is one in which all documents are received, distributed and filed electronically. Foundations that go paperless, for example, might accept letters of inquiry or proposals via their website, communicate mostly by e-mail, and file most (if not all) of their documents electronically.
A paperless system reduces the amount of paper flowing into your home or office. The advantages are many: long-term storage is inexpensive; it is convenient; and as long as computer files are properly backed up, it’s secure.
However, going paperless has at least one major drawback—paper may have more staying power than electronic files. With computer technology constantly changing, your successors may find it hard to access electronic files—even as soon as 10 to 20 years from now. It might be easier and more cost-effective for your small foundation to stick to paper files, or at least, keep a hardcopy back-up of your important records.
Hiring & Managing Staff
Factors that may weigh into a foundation’s decision of whether or not to hire staff or a consultant can include:
What kind of grant program do you have? Does your foundation give out fewer larger grants or many small grants? How often do you award grants? Do you tend to fund the same organizations year after year or are you always looking for new grantees/programs which usually takes more work? What type of due diligence does the board want completed for grants and how much time does that take?
Can you find board members who enjoy the administrative work and would be willing to continue in that role for a reasonable amount of time? Are there important tasks which are not currently done simply because there is no one to do them? Is the board so engaged in administering the grant program that there is no time for their governance and leadership role?
Has your foundation grown in asset size recently, or are you expecting a bequest in the near future? Will the increase in assets mean a significant increase in the number of grants, new areas of funding, or significant change in the style of grantmaking?
How widespread are your grantees? Can you have the contact with geographically dispersed grantees that you would like without paying someone to fulfill that role? Also, where are your board members located, and how do they conduct meetings (in person, telephone, etc.)?
Needs of the Board
Would the board be comfortable having a staff person whittle down potential grantees to a much smaller stack for board consideration or does the board want to be involved from the beginning? Would the board want the position to be more administrative or professional?
Does the foundation have a need for additional expertise not currently represented on the board, whether for specific projects or programs or for executing an innovative type of grantmaking? And, would a person of a certain expertise bring an outside point of view, fresh ideas, and value to the foundation?
Answering these questions may only indicate that you could use help with a particular aspect of your foundation work. While hiring staff may be one option to remedy the situation, hiring consultants, improving technology, and receiving administrative help may be other options you will want to consider.
Hiring takes time and sometimes money. The more thorough and careful the recruitment process is, the more likely the staff or consultant selection will be successful and long-term. Here are several tips:
Decide whether to manage the search internally or with outside assistance
If your foundation decides to handle it, designate a director or trustee to be in charge of the process and determine some type of time schedule. It will also be important to decide upon the interview process, including how many interviews, who will interview, and whether there should be a pre-screening phone interview.
Prepare an accurate job description according to identified needs
Be specific. Identify all the job responsibilities and functions you would ideally like the person to perform. It might be beneficial to list some of the personal qualities that a good candidate should possess. It is also helpful to include the foundation’s history and purpose. If your foundation has a Web site, you can direct people to the site to view more information. Sample job descriptions are available to members in the samples section of the website.
Post the position in strategic places
Some places you may consider for where to post the job may be free, others may charge. Job postings can be placed in newspapers, in grantmakers’ association newsletters or on the internet. Some local organizations (regional associations) may even send out emails to inform people of the opening. Most candidates, however, are recruited by word of mouth or through contacts and networks with colleagues. Just be sure you have enough candidates. Hiring from a field of one is never a recipe for success.
Look for experience, talent and skill, not personality or commitment to the cause
Look for candidates with previous experience working in nonprofit or philanthropic settings. Do not, however, confine your search to candidates with foundation experience–an outsider with a fresh approach can be valuable. And, it’s not always so easy to find people with foundation experience.
Engage other board members and staff in the interviewing
Different people notice different things in an interview and will have different ways of relating to the person being interviewed.
Listen in the first interview, talk in the second
Understanding that everyone has limited time, it is important to find out if the person would even be a fit for the organization before spending huge amounts of time explaining the work of the organization.
Checking references is always a good thing to do, even with those candidates with whom you are more familiar. Some foundations do background and credit checks, due to the position’s access to large sums of money.
Yes, a family member may be hired to staff the foundation—under guidelines based on reasonable services and reasonable compensation. And, in fact, for many family foundations, the first paid staff member is likely to be a family member.
First, consult your foundation’s governing documents (bylaws, trust agreement, etc.). Do they permit paying a family member for service to the foundation? In addition, you must check to see if your state has regulations pertaining to paying family members, as they do in California.
If neither your governing documents nor your state prohibits payment to a family member, you can proceed to the next step. You must determine whether the services are reasonable and necessary and whether the compensation is reasonable.
The first portion of this statement demands that the services be reasonable and necessary to carry out the tax-exempt purposes of the foundation. Under this test, the work must further the foundation’s charitable purposes; the person holding this position must be qualified to perform these services; and the extent of services must be reasonable for your particular foundation. Does the position require a full-time executive director, or would a part-time position be more appropriate, given the number of grants awarded and meetings held?
Secondly, the compensation must also be reasonable. A fair basis of comparison is what other foundations of similar size and nature pay their officers or staff in like positions. See ASF’s Foundation Operations and Management Survey which lists salaries of CEOs and other paid staff, segmented by foundation size and location.
Two final factors to remember—The IRS is more impressed with compensation decisions that are documented in detail at the time that they are made, rather than justified at the time that they are challenged. Also, remember that that amount paid to a director is a matter of public record, disclosed on the foundation’s annual tax returns, and available to anyone who asks to see it.
Some advantages to hiring family members as staff are that the individual will likely be more aware of the family values, history, and the goals of the foundation. This may enable the family member to be more confident in expressing the identity of the foundation to potential grantees and the public. A family member will most likely already have ongoing relationships with board members and maybe even grantees. And, a family member may be more likely to have a long-term commitment to the foundation.
On the other hand, it may be difficult to find a family member with the skills and expertise necessary to run the foundation. Depending upon the person and family, it may also be challenging for the family member to remain objective when it comes to family dynamics and relationships. And, while his/her views may be congruent with the family, they may not offer much freshness or diversity.
Should you choose to hire paid staff, compensation must be reasonable and the services provided must be reasonable and necessary to carry out the tax-exempt purpose of the private foundation. Compensation may even be provided to a disqualified person (staff or board member) as long as the aforementioned standards are met.
The first piece to ensure is that the services are reasonable and necessary to carry out the tax-exempt purposes of the foundation. Under this test, the work must further the foundation’s charitable purposes; the staff person must be qualified to perform these services; and the extent of services must be reasonable for this particular foundation. Consider whether you need administrative or professional help and the number of hours needed to accomplish the work.
The second piece to ensure is that the amount paid is reasonable. The IRS says that reasonable compensation “is only such amount as would ordinarily be paid for like services by like enterprises under like circumstances.” In order to compare salaries for like services, you should consult salary surveys, such as the ASF Foundation Operations and Management Report, or the Foundation Management Report published by the Council on Foundations. When searching for comparables, you may want to pay particular attention to the asset size of your foundation, its volume and type of grantmaking activities, experience level of the person to be hired, number of hours he/she will be working, and the geographic region in which he/she will be working.
Also, be sure to consider the total compensation package including bonuses, health care, retirement, and other fringe benefits.
Document your decisions, including your sources of compensation data.
Finally, remember that salaries are disclosed on the foundation’s Form 990-PF and made public at www.guidestar.org.
In our 2011 Foundation Operations and Management Report, ASF reported that 69% of the responding foundations have paid staff, including board members who work as staff. An estimated 70% provide their full-time, paid employee(s) with health insurance while 40% provide dental insurance; while 29% provide their part-time, paid employee(s) with health insurance and 15% provide dental insurance.
While ASF does offer a group Directors and Officers Liability Insurance policy, we do not have a group health insurance policy at this time. The main difficulty we encounter in negotiating group health insurance is state-specific regulations. Because of the varying state health insurance requirements, it becomes easier for local groups to negotiate group rates within each state/region rather than on a nationwide level.
You might consider looking into the following resources:
State Associations and Nonprofit Centers
Most states have state associations or nonprofit centers, and several offer group health insurance policies for nonprofits within their state/region. Find your state nonprofit association.
Nonprofit Outsourcing Firms
These nonprofit organizations offer human resource solutions to other nonprofits.
For-profit group employers allow employees of small-staffed businesses and nonprofits to become leased employees for the purposes of obtaining human resource benefits like health insurance. You can search online or check the yellow pages for listings of local group employers (under categories such as group employment, employment services, etc.).
Workers’ Compensation insurance covers employees against any job-related accident or disease. This insurance pays for medical bills, disability income benefits, and death benefits to dependents of an employee whose death is job-related. Rates are based on payroll and depend heavily on the type of business and the type of work. You should update your workers’ compensation coverage as you hire more employees to avoid being hit with an audited additional charge at the end of the year. Some states offer coverage through a state insurance fund.
While Worker’s Compensation insurance is mandatory in every state, there are several exceptions, including some states offering waivers for organizations with few staff. Check with your State Department of Insurance to ensure you comply with regulations. For more information on insurance needs, see the ASF primer Protecting Your Small Foundation with Insurance.
Regular performance evaluations—at least once a year—can help staff improve their work, and provide an opportunity to discuss salary changes. Performance reviews can be formal or informal. In some cases, staff members evaluate themselves first, and then compare their assessments with their supervisor.
It helps for the foundation to develop and communicate clear job responsibilities and performance measures to staff—from the start.
The board evaluates the lead staff person (executive director, foundation administrator, CEO) of the foundation. In turn, the lead staff person evaluates other staff members and consultants (as applicable).
Consultants can help your foundation accomplish a specific task that you and your board can’t do alone. A consultant refers to any individual or organization hired by your foundation to perform a service or provide a product that is outsourced (which means sent to an outside provider). They are sometimes called “contractors,” because they do their work based on a contract (or letter of agreement) with a foundation.
Consultants can be other grantmakers, lawyers, accountants, and financial advisors as well as meeting facilitators, strategic planners, and other project-specific professionals. They may be an independent consultant whose office consists of a computer and a phone in her own home, or a firm offering a number of consultants specializing in various areas.
According to the 2011 Foundation Operations and Management Report, 30 percent of respondents use paid consultants on a short-term or part-time basis for specialized tasks or discrete administrative functions (other than accounting, bookkeeping, tax preparation, legal or investment services).
Consultants can be employed to handle a variety of jobs or projects. They can be hired for short-term or long-term assignments. Below are just some of the ways a foundation can use a consultant:
- To create, design or manage grant programs
- To organize the foundation (board and staff structure, operational model)
- To refine the foundation’s mission
- To plan and/or manage investments
- To prepare tax returns
- To write annual reports and/or other reports
- To prepare public information materials (brochures, Web site, etc.)
- To advise on grant applications
- To help prepare meeting materials
- To plan and/or facilitate family retreats
According to the ASF 2011 Foundation Operations and Management Report, foundations most often used consultants to design websites (45 percent); facilitate board retreats or meetings (28 percent); administer grants (24 percent); or for strategic planning (24 percent).
In small foundations that are board-managed or run by one or two staff, trustees may find themselves wishing for extra time or another pair of hands to help them meet their mission. Consultants help foundations with every aspect of foundation management, including legal counsel, fiscal oversight, grantmaking support, board development assistance, strategic planning facilitation, program evaluation, and even complete foundation management.
Most small foundations use consultants at one time or another to perform a specific or ongoing task. For example, you might hire a consultant to design your grant program, manage your investments, prepare your tax returns or write an annual report. A consultant might also respond to grantseeker inquiries, monitor your database, or evaluate your grant program.
Consultants allow your foundation to gain expertise on a part-time basis without the cost and office space for full-time staff. Moreover, the board doesn’t need to supervise the consultant as they would a staff person. Consultants are skilled professionals who can help you move your program forward. Depending on the task at hand, they can bring proficiency and an objective point of view that you may not otherwise have available.
Consultants aren’t the answer for every foundation, however. With a consultant handling your administration or fronting major projects, it could mean less visibility for the foundation, especially if the consultant interacts directly with applicants and grantees. It may also mean giving up some control over the final product, and letting an “outsider” in on the foundation’s business. Consultants may also be a drain on your foundation’s resources, especially if those resources would otherwise go toward grants.
It’s important to have a clear idea on what you want to accomplish first, and then decide if a consultant is the best way to help you meet your needs.
Some important questions to ask when determining your foundation’s need for a consultant include:
- What isn’t getting done without bringing in additional help?
- What exactly do we want to accomplish so that our mission and goals are achieved?
- Do we have the expertise, time and resources in-house to accomplish it on our own?
- If we don’t have the ability to do it in-house, what kind of assistance would be most helpful? (dedicated staff person, back-office support, consultant, grantmaking software, etc.)
Each of these options should be researched to determine the most effective way to achieve your goals. A consultant may or may not be the best option.
There are four primary times when foundations consider using consultants:
- When the foundation is just starting;
- When the foundation is undergoing changes or critical transitions (e.g., change in leadership or expanding the board);
- Expanding program areas or initiating a new funding area;
- Evaluating the grant program, the board’s effectiveness or foundation overall.
Many foundations use consultants at all stages of development (not just those noted above), but these are the most common times a foundation will engage outside help, if they haven’t done so already.
Small foundations typically hire the following types of consultants:
Attorneys, accountants, and independent auditors
legally establish your foundation, keep you informed on any legislative changes, keep the books, prepare the annual taxes, assess your financial health
Investment managers and consultants
manage assets and monitor investment performance
Foundation management firms
offer a full range of services to foundations
help plan and facilitate board retreats
Strategic planning consultants
offer specific planning expertise to improve your current operations and plan for the future
design and implement evaluations of your grants program or your board effectiveness
help you to set up computer systems and troubleshoot problems
Communications consultants (writers or graphic designers)
prepare your annual report, edit or design your grant guidelines brochure, craft a foundation history, and so on.
To find member-nominated professionals who serve foundations in your area, see The Professional Directory of Foundation Advisors.
As you might expect, fees for consulting services vary widely, not only in price but also in structure. Some consultants bill by the hour or the day; others charge a flat rate based on an agreed-upon work order. Still, others may charge a percentage of grants administered or a percentage of overall assets. Much of this depends on the nature of the project and the type of work required, but also it can depend on the type of consultants (or firm), and their level of experience.
According to the ASF 2011Foundation Operations and Management Report, foundations pay the highest median hourly rates to strategic planning consultants and those facilitating board retreats and meetings ($150 per hour). Foundations generally pay $100 per hour for other services, with consultants paid the least to design websites ($80 per hour).
Find a consultant to help you in the ASF Professional Directory of Foundation Advisors.
Board members can be compensated for providing personal services that are reasonable and necessary for the tax-exempt purposes of the foundation, so long as the compensation is not excessive. These are limited to services that are “essentially professional and managerial in nature” including services considered staff functions and limited professional advisory services (e.g. legal, accounting, investment or banking services).
Hiring board members as paid consultants, however, can raise the potential for conflict of interest and self-dealing. Weighing the pros and cons of hiring an insider is important to do before making any final decision. In addition, it is critical that you follow a conflict of interest policy when making decisions of this sort, particularly when it comes to compensation.
Before you hire a consultant, start by deciding what you need. Only then can you find out who in the field can best help you meet your goals. Here are some questions you might pose to the board:
- How will hiring a consultant help us fulfill our mission and goals?
- What specific things do we want to accomplish by hiring a consultant?
- Is it important that the consultant have worked with other foundations?
- Should the consultant be located within our geographic area? Or would we feel more comfortable with someone outside of our local circle?
- What should we expect of the consultant? Of each other?
- How will we measure success? How will we evaluate the consultant’s performance?
- What is our timeline for hiring a consultant? For having the project or service completed?
Once your board has discussed the project needs and desired skills you seek, it helps to draft an informal “job description” for your consultant-to-be. Job descriptions describe the consultant’s role and eligibility, and give candidates a clear idea on what your foundation wants to accomplish.
Then, identify a number pf potential consultants to interview. Most small foundations identify consultants through colleagues or word of mouth, or by asking membership associations. (To find member-nominated consultants, search the ASF Professional Directory of Foundation Advisors.)
Then begin screening potential candidates by finding out if they would be a good fit for your needs.
Once you’ve narrowed down your pool to a few choices, meet with the consultants in person. Make sure you (or whoever the consultant will be reporting to) are comfortable with the person(s) you may hire. And no matter how confident you are of your favorite candidate, it is always a good idea to check references.
When it comes to drafting a contract, some consultants will work on a simple letter of agreement, others will want detailed contracts. Contracts often include a description of services to be performed, costs, timetables, reporting requirements and processes for changing the scope or any other elements of the contract. It may be a good idea to have your lawyer look over the contract.
The best way to find a good consultant is through word of mouth. Ask your foundation colleagues who they use. ASF members may post a query to the ASF Discussion List or find peer-to-peer advice in the Member Directory.
Anyone may refer to the ASF Professional Directory of Foundation Advisors, which includes accountants, attorneys and consultants your foundation colleagues have nominated. In addition, check with the National Network of Consultants to Grantmakers for a list of potential consultants.
You might also check with other associations of grantmakers, or your local community foundation, which may keep a list of consultants in your area. If your foundation needs a qualified lawyer or accountant, you can also contact local professional associations (e.g. the local bar association or your state society of public accountants).
Once you identify a list of potential candidates, consider drafting a Request for Proposal (RFP) that outlines your needs. An RFP for consultants introduces your foundation, what you hope to accomplish and how consultants should apply for the job. Or you might bypass the RFP process, and simply contact a few consultants by phone.
Ask consultants to prepare a proposal (free of charge) for your review. A proposal (sometimes called a “bid”) will give you a good sense of their background, skills and working style. Proposals don’t have to be lengthy or formal, but they should at least touch on the following:
- Consultant’s background—skills, experience, working style;
- Objectives and approach—a description of the desired outcome, and the tasks to achieve that outcome;
- Deliverables—a description of the products or services;
- Timeline—a schedule for when the products or services will be delivered;
- Fees and expenses—a description of both how the consultant charges (by the hour, day or the project, for example), and how much (including expenses);
- References—other organizations with which the consultant has worked;
- Contact information
Bringing in a consultant is like bringing on another “insider” to your board and its work. You will work closely with this person, and therefore, you will want a consultant who shares similar values to your foundation and its mission.
Consider the professional and personal qualifications that would be ideal for a consultant. Think of the traits you would want if you were hiring a professional staff member. For example, you will likely look for consultants with:
- Expert knowledge in the subject area of the project or service;
- Experience with projects (or foundations) similar to yours;
- A respected track record with other clients of getting the work done well and on-time; and
- A working style and sensitivity that fits well with your foundation.
Other questions to consider include:
- How well does the person seem to understand the goals?
- How familiar is he or she with the “language” of foundations?
- Does he or she ask informed and creative questions about the foundation and the project?
- Does he or she communicate clearly and confidently?
- Do you trust the person to do a good job?
- Do you, or other staff or members of the board, sense any “red flags”?
Many times, trustees will say how important it was to not only have the outside expertise, but also to have a consultant who “clicked” with their board. Overall, you want someone with an amenable working style, someone who helps the board come to its own decisions rather than deciding for you, and someone who is willing to take the initiative and follow-through.
Letters of agreement are generally less formal than contracts, but they serve the same purpose—to clearly define the assignment, service or product the consultant will render, along with the deadlines and fees. Sometimes, a letter of agreement will include the work plan as an attachment.
Written agreements with a consultant can be prepared by either party. If the consultant doesn’t have a standard agreement—or if you prefer to draft your own—consider including the following key items in the letter:
- Nature of the work, specific tasks, and what will be delivered (products and/or services);
- Length of work period (described by number of hours, days or months, for example);
- Work setting (i.e., will the consultant work at the foundation’s office, or off-site?);
- Deadlines and a timeline for the work (also called a work plan);
- Fees and payment schedule (i.e., will the foundation pay in advance, in increments or after the work has been completed? What expenses, if any, will the foundation cover?);
- Ownership of the work product (i.e., if the consultant is writing a book or report for the foundation, who will claim ownership? Will the consultant be given a byline?);
- Expectations for reporting, evaluation and performance standards (i.e., how will you measure the success of the consultant’s work?);
- Termination clause (i.e., what will the procedures be if one or both parties decide to end the project, service or working relationship?).
By defining the scope of the work and expectations upfront, you’ll help guarantee a better working relationship with your consultant. As always, ask your attorney to review this written agreement.
Once a consultant has been hired, they need to be supervised. Without adequate guidance, it is hard for a consultant to succeed. As one ASF member says, “Foundations shouldn’t hire consultants if they don’t have the ability to manage them.” Develop specific goals, deliverables, and meetings times laid out from the start. Plans may change, so you should always leave room for flexibility. But having a clear plan from the start can foster a better understanding of expectations on both sides and facilitate better communication as needs change along the way.
Before you’ve hired a consultant, you will need to discuss and create a work plan. A work plan is a basic timeline of what will be done, by whom, and by what deadlines. Many times, the initial proposal drafted by the consultant is used as a basis for the work plan—but then refined after more discussion.
Work plans are a tool for you and the consultant to determine roles and responsibilities for the project or service. When developing a work plan, it helps to discuss the following:
- What tasks need to be completed?
- Who will be responsible for what? What is the role of the consultant, and the role of the board and/or staff (if any)?
- Who will be the consultant’s primary point-of-contact within the foundation?
- Who will oversee the consultant’s work?
- How will the consultant work with/communicate with the board and/or staff?
- What will be the timeframe for all the activities?
- What type of wrap-up activities will the consultant do?
- How will the foundation measure the consultant’s performance?
- What can the foundation do to help the consultant succeed?
It’s much better to get these issues out in the open at the start of the planning process. Doing this will help everyone understand their role and avoid any potential misunderstandings along the way.
A person who is hired to perform tasks for your foundation may be classified by the Internal Revenue Service (IRS) as an employee or an independent contractor. Simply calling someone a “consultant” does not make them an independent contractor. In making its determination, the IRS looks at a number of factors. For example, it considers workers “independent contractors” if the company they work for does not manage how they work—except to accept or reject their final results.
Be sure to classify your consultants as independent contractors, and make sure they meet the IRS test. Otherwise you will be required to withhold and pay employment taxes on their behalf. To find out more about how the IRS classifies workers, visit the IRS website.
Foundation management firms are organizations that offer a full range of services to foundations that employ few (if any) staff. A foundation management organization may be a private business or professional practice, a nonprofit organization or a community foundation.
Management firms handle the “back office” details that keep a foundation running, so that the board can focus more on grantmaking and fulfilling its philanthropic mission. For example, if a family or group of people want to start a foundation but don’t have the time or the desire to administer it, they can get everything taken care of—from incorporating the foundation and setting up its programs, to full-time administrative, operational and grantmaking support.
According to figures from the ASF 2011 Foundation Operations and Management Report, 12% of ASF respondents are fully administered by an outside firm, company or consultant.
A foundation may include any administrative expenses in its 5% payout requirement that are necessary (and reasonable) for the foundation to carry out its charitable purpose. Typically these are costs associated with grants, direct charitable activities and program related investments, and include salaries, rent, travel, training, photocopying, etc. Expenses which cannot be included are those related to ongoing investment management, such as investment consultant fees, custodial fees, attending investment conferences, etc. (However, the initial cost of purchasing an asset can be included.) Foundations should also exclude the portion of salaries and other administrative expenses that are related to ongoing investment management.
Some foundations reimburse trustees for miles they drive for foundation business using personal vehicles, while others do not. ASF recommends developing a policy for your foundation about reimbursing mileage and other expenses. If you choose to reimburse mileage, there are two options:
- Foundations may reimburse their trustees and staff for mileage related to foundation business, at the IRS rate which is currently 55.5 cents per mile (valid in 2012).
- Or, a foundation trustee may deduct their mileage on their personal income tax return, at a rate of 14 cents per mile. They must comply with IRS documentation requirements.
While survey reports can give you insight to what other foundations are spending on administrative costs, there is currently no legal limit to these expenditures–just that they be reasonable and necessary to carrying out the charitable purposes of the foundation.
As reported in the ASF 2011 Foundation Operations and Management Report, ASF member foundations averaged 1.72% of non-charitable use assets going to total administrative expenses. Among foundations with paid staff, the average was 2.04%; and among foundations with no paid staff, the average was 1.03%.
Information about typical operating expenses for foundations by asset size can be found in ASF’s Foundation Operations and Management Report. Keep in mind that many factors make up operating expenses, including whether a foundation: has staff or not, rents office space or not, gives locally or nationally, has a small or large board, etc.
While some foundations can best achieve their mission by spending more on grants and less on administration, not all foundations should make it a goal to spend a minimal amount on administration. For example, a foundation that offers technical assistance to its grantees as part of its mission may have to hire staff, ultimately, having higher administrative costs.
Examples of other activities that may be invaluable, but will cost something include: producing materials that detail the grant activities, mission and guidelines of the foundation; convening groups of grantees in the same field to encourage sharing ideas, brainstorming, and networking; attending board trainings; and incorporating site visits as part of the proposal review process; using social media to increase awareness of your foundation’s interests and your grantees
It is likely that you will spend more if you engage in the above activities, but the increase in expenditures may be far outweighed by the increased impact of the grant or service provided. A foundation is completely justified in spending to further its charitable purpose, as long as the expenses are reasonable and necessary.
To benchmark your grantmaking foundation’s administrative expenses against that of your foundation peers, use the ASF Foundation Operations and Management Report.
Technically speaking, there is no limit on the amount you can spend on administrative expenses. However, there is a requirement that all expenses must be for charitable purposes and that those expenditures be reasonable and necessary. You should consider comparing your administrative costs to those of similar foundations doing similar work. Studies that may be helpful in this area are the ASF Foundation Operations and Management Report and the Council on Foundation’s Foundation Management Report.
It is the board’s responsibility to approve and monitor the foundation’s budgets, and assess the financial performance accordingly. Either the foundation administrator, or the accountant and/or board treasurer, should report to the board on a regular basis as to the foundation’s financial health. In most foundations, this person will prepare monthly or quarterly financial statements—showing the annual budget, spending for the specific period, total spending year to date, and perhaps, spending as a percentage of the total budget.
Budgets are both a financial tool to help manage operations as well as a fiscal control mechanism. They give your board a clear sense of available, committed and unrestricted funds, and help the board understand the relationship between operating costs and grantmaking expenditures. Foundations typically use three types of budgets:
- Operating budget, which includes administrative expenses;
- Capital budget, which includes expenses for buildings, equipment and furniture (sometimes this is combined with the operating budget);
- Grants budget, which includes grants paid and expenses associated with grants.
An operating budget, as distinct from a grants budget, is your foundation’s blueprint for yearly objectives. The foundation administrator (as applicable) and the board, in conjunction with a qualified accountant, will determine the best way to set the annual budget.
Below is an example of one small foundation budget. Keep in mind: Small foundations are atypical by nature, and their budgets must be tailored to meet individual foundation needs.
This foundation has assets of $18 million and gives 35 to 40 grants a year, ranging from $5,000 to $100,000. Two staff members manage the day-to-day activities of the foundation, including the publication of an annual report. As staff, they are paid a salary and receive additional benefits including health insurance, disability, free parking, and a 403(b) plan. Nine board members serve as trustees.
Expenses Subtotal $223,355 Grants $875,000 Total Expenses $1,098,355 Federal Excise Tax $30,000 Investment & Custodial Fees 80,000 Legal 8,800 Accounting 6,700 Insurance (Office) 505 Payroll Services 1,100 Filing Fees (State, Legal, Federal) 800 Bank Service Fees 600 Salaries, Wages & Benefits 71,400 Consultant 2,000 Professional Organizations 3,600 Occupancy 6,200 Telephone 1,500 Maintenance/Repair 300 Office Furnishings/Equipment 300 Postage 600 Supplies 500 Books/Subscriptions 350 Printing/Graphics/Photography 2,000 Parking & Mileage 1,100 Travel/Professional Meetings 4,000 Board Functions/Hosting 500
Press Releases & Annual Reports
Although there is no legal requirement to produce an annual report*, an annual report is an opportunity for your foundation to communicate —a summary of your mission, goals and interests, the projects you’ve funded in the past, and what you hope to fund in the future. For small foundations, it may be the only publication you produce.
By clearly communicating what you do and do not fund, and providing guidelines for potential grantseekers, you not only will improve the quality of applications you receive, but you will reduce the number of ineligible requests - ultimately saving grantseekers time as well. This is especially true if you do not make your grant guideliness available in any other format
Finally, annual reports help the public and lawmakers learn about foundations—and see that they are responsible and accountable organizations. This not only helps your individual foundation; it helps the entire field.
*Note: Some states require foundations to submit an “annual report” along with their Form 990-PF so that regulators can ensure foundations are fulfilling their charitable purpose. This is typically a template that must be completed, as determined by the state, and should not be confused with the type of annual report we speak of above.
An annual report is a summary of the foundation’s activities for the previous year. It can include any or all of the following:
- Year and name of the foundation;
- Mission, vision, values, and brief history;
- Statement by the board chair and/or executive director highlighting some aspect of the foundation or philanthropy;
- Overview of the organization and board structure, including current board and staff members;
- Report on total funding given and grant activity last year;
- Brief narrative of a few key grants;
- Brief financial data, such as total assets and financial institutions holding the foundation’s funds;
- Report from the independent public accountant who audits the books (if applicable);
- Grant guidelines and annual timeline (deadlines, decision announcement dates, etc.);
- Contact information for the foundation.
Good recordkeeping throughout the year will make it easy to compile your annual report. Here are some tips:
Start a folder at the beginning of the year
Use it to save lists of grants, speeches by board members and staff, newspaper clips, news releases, fund reports, photos, etc.
Look at the annual
Reports from colleague foundations to get ideas.
Write as you go
About grants and events.
Ask grantees for photographs
Take photos at events that occur throughout the year.
Consider the tone
Of your annual report. Most small foundations want to come across as down-to-earth and accessible, instead of stuffy or unapproachable.
Depending on the needs and budget of your foundation, annual reports can be a short, typed document listing the year’s grants, or an elaborately designed and printed publication. Some foundations hire communications consultants to write their annual reports; others do it in-house, typed as a simple one- or two-paged letter. One important point: they don’t have to be lavish or expensive to be effective.
Once you have your annual report ready, you will want to distribute it widely—to your extended family (for family foundations), grantees, potential grantseekers and the larger community. Take your reports to meetings, conferences and other events. Mail it to board members, grantees, reporters, elected officials, foundation colleagues and others. Some foundations even publish their annual reports online—either on their own website, or through an outside service such as The Foundation Center.