Funding from a Foundation
Charitable private foundations are required by tax law to pay out, through grant making, 5 percent of the total corpus (endowment plus earnings) each year. They usually invest their endowment funds. In years that the stock market does well, they earn more than the 5-percent payout requirement and are able to build the corpus of the foundation. In years that their investments, overall, earn less than 5 percent, they must dip into the corpus to meet the payout requirements. Poor earnings in a single year won't affect a foundation's corpus or its ability to award grants, but if the market continues to decline in subsequent years, those foundations that have no means of income other than earnings from investments will suffer, and so will the nonprofits that they fund.
While there are variations in type and size, in general, grant-making foundations are either private foundations or grant-making public charities.
Private foundations are nongovernmental, nonprofit, grant-making organizations managed by a board of trustees or directors that make grants for charitable purposes. They include corporate foundations, family foundations, private independent foundations, and operating foundations.
Grant-making public charities are 501(c)(3) nonprofit organizations that derive their funds from multiple donors, have a charitable purpose, and make grants. They include community foundations and public foundations.