5 Steps to Take to Start a Foundation

People who want to make a philanthropic impact often start private foundations, which provide a number of benefits, from tax advantages to legacy planning. Private foundations are essentially nonprofit and nongovernmental organizations created for charitable purposes. These organizations can be created by individuals, families, or corporations to facilitate donations to philanthropic causes in a tax-advantaged manner. If you are thinking about starting a foundation, the first step is getting familiar with the rules around these organizations, including how to qualify for special tax status through the IRS and the requirements for disbursements to maintain that status. The other steps involved in starting a private foundation include:

1. Figure out your reasons for starting a foundation.

Many reasons exist for starting a private foundation, and figuring out what applies to your situation from the start is important in terms of structuring the organization. Often, people create foundations for tax advantages. You can donate up to 30 percent of your annual income to a private foundation and get a tax deduction for that amount. You may also want to start a foundation because you are particularly interested in a certain cause and want to funnel money into it. Always think about the causes you would like to support prior to starting a foundation. With a foundation, you have tight control over your philanthropic activities. You should think about the extent to which you want to involve your family members, who can become part of the board or staff. Foundations can also play an important role in legacy planning to carry on your work after your death.

2. Incorporate within a state.

All private foundations must be incorporated in the state in which they conduct business. Typically, you should hire an attorney to do this unless you have the experience necessary to do it yourself. Note that the requirements for incorporation vary between states, so always check what is necessary in a particular jurisdiction. The business office of the Secretary of State should have a clear outline of what you will need to do. In general, you will need Articles of Incorporation, a legal document that creates the organization, and a preformed board with a certain number of members. In addition, you will need to verify that the name you choose for the foundation is not already in use and will need to pay a filing fee.

3. Create internal policies.

Your foundation will need some internal documentation outside of the Articles of Incorporation. In particular, you should create a policy regarding conflict of interest that will outline what to do when these issues arise. Usually, the policies require board members to disclose potential conflicts and avoid making decisions involving personal interests. You should additionally consider creating by-laws, which are akin to internal operating rules. By-laws describe how board members get selected and what the terms for board membership are. In some states, by-laws are required for all nonprofits, including foundations. However, this is not always the case. Even if by-laws are not required, having this reference is a good idea in case of conflicts down the line or as a guide in case confusion about processes arises.

4. Write your grantmaking guidelines.

Your grantmaking guidelines will identify the specific areas in which you hope to make an impact through your foundation. The document outlines the general process for distribution of funds to support these identified causes. Think about how you want to select grantees, which may be through your own identification or as part of an application process. If you want to go the application route, you will need to outline this process. The guidelines should specifically state all the information you want to receive from applicants, as well as the calendar for applications. Some foundations accept applications on a rolling basis while others work according to deadlines. In addition, the document should provide a general sense of grant ranges. This decision depends largely on the size of your endowment and how the invested money is performing. Deciding on a range is important to give yourself flexibility in grantmaking.

5. Comply with federal laws.

Once your foundation is incorporated, you will need to apply for an Employer Identification Number, which is similar to a Social Security number for businesses. You should apply for this number even if you do not plan to have employees for IRS identification. This number can be secured by mailing in paperwork, using an Internet application, or calling the IRS Business & Specialty Tax Line. In addition, you will need to apply to the IRS for tax exempt status, which involves Form 1023. The form goes over the board of directors, financial information, primary activities, and more. Before you apply, be sure to have your grantmaking guidelines written, as you will need to include this information. You will also need to submit Articles of Incorporation, by-laws, and any other organizing documents. This form does require a filing fee. Also, you should be aware that the IRS will frequently contact you with follow-up questions.

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