Donor Advised Fund vs. Private Foundation: What's the Difference?

Those with a charitable heart have a wide array of options for distributing money to the nonprofit (or nonprofits) of their choice. 

On one hand, private foundations (think the Gates Foundation) can be effective charitable vehicles for uber-wealthy individuals and families. On the other hand, donor-advised funds (DAFs) provide many of the same tax advantages without most of the regulatory considerations of foundations.

So, DAFs must be far and away the better option…right?

They certainly might be, but it’s worth exploring the reasoning behind that assertion. Come with us as we debate donor-advised funds vs. private foundations to help you determine which one is best suited for your company.

Table of Contents:

• What Is a Donor-Advised Fund (DAF)?
  
  • Employee DAFs
• What Is a Private Foundation?
• Donor-Advised Funds vs. Private Foundations: Which Is Best?
• Private Foundation vs. Donor-Advised Fund: Which Option Is Best for My Organization?
• How to Start an Employee Donor-Advised Fund with Groundswell

What Is a Donor-Advised Fund (DAF)?

A donor-advised fund (DAF) allows individuals—including your employees—a way to contribute appreciable assets and delay distribution while deducting the full amount of the contributions in the current tax year. Deduct now, pay later (much later, if you want). 

Instead of forcing you to donate directly to the charities or nonprofits of your choice (not necessarily a bad thing), DAFs require you to park the assets in a sponsoring organization’s account. 

The sponsoring organization could be a corporate foundation, investment firm-adjacent nonprofit, or a faith-based organization. While the sponsoring organization has the ultimate say on where your assets go, they’ll most likely follow your recommendation.

DAFs are sometimes called a “foundation in a box” because they have many of the desirable qualities of a corporate foundation—tax advantages, the ability to donate appreciating assets, and having at least some control over who will eventually receive the donations.

Employee DAFs

Even though donor-advised funds cut out many of the regulatory and administrative burdens of foundations, they haven’t always been accessible to employees. 

Groundswell now offers the ability to provide DAFs to individual employees as a workplace benefit. DAFs allow your workers to get a little more creative with their charitable endeavors and can complement your company’s current giving program. 

What Is a Private Foundation?

A private foundation is a standalone legal entity whose purpose is to financially support charities and nonprofits. Companies and extremely wealthy families often start foundations to leave lasting legacies in philanthropic ecosystems.

Because private foundations are 501c(3) organizations, they must file annual tax returns. Foundations also have boards and governance documents, which can take some time to create. In many cases, corporate foundations employ their own staff to handle their obligations to the IRS and other government bodies.

Donor-Advised Funds vs. Private Foundations: Which Is Best?

The rise in popularity of donor-advised funds has compelled many CSR (corporate social responsibility) thought leaders to rethink the value propositions of private foundations. Foundations produce great results for sponsors with enough resources to organize and manage them, but not everyone has that luxury.

In short, the question is: are the advantages of DAFs enough to offset their limitations relative to corporate foundations? The answer is not completely straightforward, but we’ll present a private foundation versus donor-advised funds comparison that should cover your key considerations.

Branding Opportunities

Private corporate foundations have historically been effective in increasing goodwill for sponsoring companies. As standalone organizations, foundations have numerous opportunities to spread awareness of their charitable giving and social impacts.

In the 21st century, though, corporate branding is about more than just letterheads, highway signs, and earned media. The proliferation of social media has given companies more control over their own brands and more opportunities to increase public awareness of their CSR programs. Assembling impact reports is now standard practice for most mid-sized and larger businesses.

Advantage: Even

Administrative and Legal Burdens

Without question, creating and managing a private corporate foundation is much more cumbersome than using a DAF. Foundation setups routinely involve attorneys, accountants, board recruitment, and gigantic infusions of capital. Between all of those obligations and formalizing the foundation’s giving strategy, you’ll likely spend a year or more in the active planning and setup phase.

Once a foundation gets rolling, key players must take great care not to engage in self-dealing, which can be a tricky situation. Because of the numerous regulatory considerations that attach to corporate foundations, many donors prefer the hands-off approach offered by DAFs.

Advantage: Donor-Advised Funds

Tax Benefits

While deductions and other tax advantages are not the driving impetuses behind any company’s CSR programs, they do merit some discussion. 

In short, the tax advantages of DAFs are nearly identical to those of private foundations. Donors can deduct the donation amounts in the current tax year, and they can watch their assets appreciate without having to worry about capital gains taxes. 

However, foundations typically pay excise taxes of 1.39 percent on net investment income. Corporate foundations must also submit annual tax returns to the IRS and, in some cases, make quarterly contributions. The sponsoring organizations of DAFs are responsible for dealing with the IRS, which lightens the load quite a bit for you, your company, and your coworkers.

Advantage: Donor-Advised Funds

Private Foundation vs. Donor-Advised Fund: Which Option Is Best for My Organization?

Private foundations have made immeasurable impacts throughout the world, and they continue to do so.

But there’s simply no reason your company cannot have a similar-sized impact with employee and company-wide donor-advised funds. Unless (or until) your company establishes a 501c(3) foundation, you and the rest of your employees shouldn’t have to worry about the never-ending legal and regulatory concerns that go along with them. 

With a donor-advised fund, your company can realize immediate tax deductions, wait a few years until assets appreciate, and take the time to formalize giving strategies. Combine those advantages with the benefits of using a sponsoring organization to take care of the administrative work, and we feel there’s simply no contest.

How to Start an Employee Donor-Advised Fund with Groundswell

Groundswell’s CSR software was built with convenience and affordability in mind. No matter your company’s size, it has the human capital necessary to change the world. 

Along with employee donor-advised funds, our platform enables:

• Employee donation matching
• Corporate grantmaking
• Employee volunteering
• Dollars for Doers
• Employee assistance funds (EAFs)

We make it all happen through an all-in-one, comprehensive, mobile-friendly software. Schedule your company’s personalized demo today to see how you can bring your social impact goals to life.