Foundation basics

‍How do you start a private foundation?

Starting a private foundation is a complicated task and should not be considered a DIY kind of project. The complicated filings and paperwork should really be handled by a specialist. It is possible to set up a private foundation as either a nonprofit corporation or as a legal trust. Both options lead to the same result but in practice it is much more common to use a nonprofit corporation as the underlying vehicle. Below we lay out the general outline of the process to start a private foundation using the more commonplace form of a nonprofit corporation.

Define the charitable purpose:  

In order qualify as a tax-exempt organization, the foundation must meet the exempt purposes set forth in section 501(c)(3) of the Internal Revenue Code. As such the purpose must be charitable, religious, educational, scientific, literary, or for the purpose of testing for public safety, fostering national or international amateur sports competition, or preventing cruelty to children or animals. The foundation is free to define its purpose very broadly or it can focus its purpose on specific causes.  

Check Name Availability:  

One of the earliest steps is to check if the desired name for your foundation is available in your state. Oftentimes this is done by checking with the secretary of state office. Having a name that is similar to an existing foundation is allowable in general. For example, if a certain state already has the “Kirk Foundation” registered, it almost certainly would be permissible to name your foundation the “James T. Kirk Foundation”.

Produce Articles of Incorporation:  

This is the formative document that legally establishes the foundation in its home state. The document should be drafted in accordance with state law where the foundation is formed. The date of incorporation correlates to the “birthdate” of the foundation.

Apply for a Federal Employment Identification Number (EIN):  

The foundation will need a federal identification number that is quite similar in function to how a social security number identifies an individual. It is a very simple matter to apply for an EIN with the IRS.   An EIN is required even if the foundation will not hire any employees.  

Draft Bylaws:  

The bylaws are the rules that govern the foundation’s day-to-day operations. They typically cover meeting rules, roles and responsibilities of the officers and directors, term length and other fundamental governance issues. The bylaws must conform to IRS rules as well as state law. 

Draft Conflict-of-Interest Policy:  

In order to become an approved 501(c)(3) organization, the nascent foundation will need to report to the IRS whether a conflict-of-interest policy in place. The IRS has specific requirements for the conflict-of-interest policy. For instance, the policy should require those with a potential conflict of interest to disclose the issue and recuse themselves from voting on any matter in which there is a conflict. 

Application for 501(c)(3) status:  

The official application for recognition of tax exemption is done using IRS Form 1023. The form is over 25 pages, includes a lot of technical jargon, and requires a fair amount of supporting documentation. The processing time for Form 1023 is typically between 3 and 12 months.

State Tax Exemption:  

After the IRS approves the foundation as a 501(c)(3), some states, such as California and Texas, require additional filings with the state’s department of revenue for the tax-exempt status to be recognized. The requirements for this step vary widely.

State Fundraising Registration:  

Almost all states require that private foundations register if they will be soliciting contributions or donations from outside sources. Large donations from the family do not typically trigger a requirement for the foundation to register. There is a lot of variability at the state level regarding fundraising registration requirements. 

Ongoing requirements:  

The ongoing requirements for foundations are complex and the penalties for non-compliance can be severe. Two of the key requirements are (1) the obligation to annually distribute approximately 5% of the foundation’s assets towards the foundation's charitable mission, and (2) an annual reporting to the IRS using Form 990-PF. There are many other ongoing requirements at both the federal and state level and professional help is recommended.

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Foundation basics