Can a For-Profit Company Form a Nonprofit Foundation for Scholarships?

Both tax incentives and a disposition toward good citizenship entice companies to donate billions each year to charity. Sometimes for the sake of easier administration or because of a large amount of annual giving, a business will set up a separate foundation responsible for the bulk of its charitable giving. The decision to undertake this commitment must be well thought out.

As with any other nonprofit, when a company decides to form its own foundation, it has to have a specific mission it intends to advance. Funding scholarships would come under the education classification, meaning the foundation could apply for a 501(c)3 tax exempt status. Additionally, foundations must choose between organizing as an operating foundation or a nonoperating foundation.

An operating foundation is a designation for a nonprofit that channels its funding directly to a single source. Although the designation usually is reserved for museums and other institutions that funnel the bulk of the received income into the operations and maintenance of facilities, it can also be used for making direct grants to individuals. A nonoperating foundation is one that disburses funds to other charities. If a foundation were formed, for example, to give scholarship money to schools for disbursement, it likely would be a nonoperating foundation.

Instead of a nonprofit foundation, a company that wants to give scholarships directly to employees could consider establishing a Voluntary Employee Benefit Association (VEBA) trust. An employee trust is a 501(c)9 designation that is a separate entity from the one that established it. It allows contributions from either a single source or a multiple number of sources and can be disbursed to employees, former employees or dependents. Since it can be used to cover any extra employee benefit expenses -- VEBA trusts are often used for healthcare and unemployment -- a scholarship trust must be designated as an educational VEBA trust from the outset.

Administering a nonprofit is like running a second company. It requires a separate administrative team, a board of director and bylaws. The operation requires an endowment as well as regular funding. Establishing a scholarship fund is one of many nonprofit endeavors open to a for-profit company. Although many nonprofit foundations provide scholarships, few if any exclusively do. If the goal is to provide scholarships, the tax benefits of charitable donation may outweigh the liability of establishing a nonprofit. If the object is to establish a foundation, choosing a wider scope will provide more benefits and opportunities.