What is a Foundation?
Section 501 (C ) 3 of IRC (internal revenue code) defines the charitable private foundation and offers them the status of tax exemption. It’s a default status offered to organizations for tax exemption of 501 (C ) 3 of nonprofit status. Today, we’ll discuss how to start a foundation.
Unlike public charities, private foundations have got the option to offer grants and donations to other charitable organizations and charities. Launching a private foundation is like starting a business; you have to define your purpose, apply for the status of tax exemption, earn permits and licenses; file for the state tax documentation and set organizational structure.
If you want your foundation to qualify for the tax exemption; then its purpose should fall in any of the following categories;
- Prevent cruelty to animals and children
- Foster national/international amateur sports
- Public safety testing
- Scientific charity
- Library charity
- Educational charity
- Religious charity
- Its purpose should be maintaining a public building, advancing education, and assisting the poor
Purpose of Foundation
Unlike public charity organizations, private charity foundations offer donations called “grants” to other charities. They don’t conduct charitable operations of their own; and they offer grants either to fund a specific program or general operational expense of the company. They have to follow the rules of IRS (internal revenue service) while offering grants to the individual person.
The activities of foundations both public and private are the same; they have to keep offering benefits to the general public in order to maintain their status of tax exemption. According to IRS, some of the key differentiating features of the private foundation are as follows;
- Paying 1-2% excise tax on the net income of the organization
- Offering grants to other nonprofit organizations like student scholarship programs
- The worth of the grant should be around 5% of the assets of the foundation annually
Why Launch Private Foundation
It’s possible you have developed a habit of donating a large amount of money to charities; it makes you realize that you should have your own foundation. Running a charitable foundation under your own name is a very prestigious cause and it intrigues the attention of some people.
A grant-making –the foundation is a very common form of foundation. Its founder could be a corporation, a family, a married couple, or an individual person. However, the endowment is the term for the asset of the private foundations; the foundation invests its endowment for generating its assets.
It’s highly expensive and time-consuming to launch a private foundation because thousands of corporations, families; individuals have started it based on their beliefs.
How to Start a Foundation
Let’s discuss some of the main steps on how to start a foundation, and they’re as follows;
Define your Purpose
First of all, you should define the purpose of your private foundation and set guidelines for offering grants. The definition and guidelines would direct the routine activities of your organization, and it is important to gain the status of tax exemption.
Trust & Nonprofit
Now, you have to decide the structure of your organization; whether it is a nonprofit corporation or a charitable trust. It is easier to operate and establish a charitable trust, but it doesn’t provide much legal protection to the trustees as a nonprofit corporation. Speaking of nonprofit corporations, they’re difficult to create, but they’re more common than charitable trusts because they offer more flexibility and protection of personal liabilities.
If you want the trust structure of your organization, then you have to appoint trustees. If you want the corporate structure of your organization, then you have to follow the steps of establishing the corporation.
EIN (employee identification number)
After deciding on the structure of your organization, you have to apply for the EIN (employee identification number). It’s a requirement of the IRS to have an EIN of your organization, even if you aren’t planning to recruit any employees. The EIN would act as the TIN (tax identification number) of your organization, just like the SSN (social security number) of a person.
File for Tax Exemption
Here you organize your documents and file with IRS. You have to fill out form 1023 and organize all the required relevant documents to support your documents (form 1023 is the application for recognizing the exemption under section 501 (c ) 3 of IRS.
You have to provide the identifying information about your organization and how you’re going to organize and operate various functions in the form. The application form has a specific fee and you have to pay for it. You can only fill out the form and apply for it at the IRS website. After getting approval for tax exemption from IRS, you should submit some documents in your state in order to achieve the tax-exempt status.
Regulations & Penalties
In order to maintain the status as tax-exempt; IRS offers some guidelines and prohibited activities that the organization should avoid and they’re as follows;
- Joining a political campaign on behalf of a person (or an opponent) that is running for the office, and comprises making contributions or issuing a public statement
- Offering salaries to the insiders like directors, officers, employee
- Allowing insubstantial benefits including nonmonetary benefits to the person
When it comes to running a private foundation, then it incurs a lot of expenses like any other business and comprises a lot of responsibilities. You have to hire employees, file an annual tax return by using Form 990-PF, and maintain a proper record of it.
It’s better if you hire a professional that has got an experience in accounting, tax filing, corporate filing, bookkeeping, and accounting. When it comes to launching and running a private foundation, you would need specialized knowledge and expertise to make the right choices.
Conclusion: How to Start a Foundation
After an in-depth study of how to start a foundation; we have realized that running a private foundation is very expensive and requires a lot of work. If you’re planning to launch it, then you should follow and practice the abovementioned steps.
Ahsan Ali Shaw is an accomplished Business Writer, Analyst, and Public Speaker. Other than that, he’s a fun loving person.