This post was contributed by Wild Apricot.
Have you been thinking about starting a foundation?
First things first, you should know how foundations differ from nonprofits and charities. Generally speaking, the foundation’s only activity is providing funds and grants to nonprofit organizations. They do not typically carry out actual services or programs like nonprofits and charities do. The exception is operating foundations, which both fund and manage charitable activities.
Private foundations rarely raise money but are instead funded by cash investments, securities, and other assets. A foundation should have a 501(c)(3) status, and while exempt from income tax, they’re taxed on excise investment income.
There are many benefits to forming a foundation:
Just like with any business venture, starting and maintaining a foundation entails quite the to-do list. We broke it down into three parts, including formative organization documents, essential foundation forms, and important compliance issues to keep in mind.
Disclaimer: we’re not experts in nonprofit and foundation law or finance, so please note that this post is our best understanding of the available resources but should not be used as a substitute for advice from a qualified professional.
Before you get incorporated and file the necessary forms to become a foundation, you will decide how your foundation will run and create a few formative documents.
Step 1: Decide if your foundation will be a nonprofit corporation or charitable trust. Nonprofit corporations are more common and more flexible in how they distribute funds but have stricter operating requirements. Trusts are easier to form and operate, but trustees will have less legal protection than with a nonprofit corporation.
Step 2: Create your articles of incorporation or declaration of trust. This is a crucial document that will serve as the constitution of your foundation. Sections will likely include basic foundation information, type of structure, purpose, board of directors or trustees, and duration of the foundation.
Step 3: Make your bylaws. You’ll be required to establish bylaws for your foundation, which are rules that will govern how it runs. This will include areas like day-to-day operations, meetings, and electing directors, officers, managers, and trustees.
Step 4: Choose your board of directors or trustees. These people will play a significant role in your foundation and will have the ultimate and final say on your foundation’s matters. When choosing a board of directors or trustees, foundation owners should take into account commitment and passion to your foundation’s cause, skill sets, and possible connections within your foundation’s purpose.
There are a few one-time forms to file to be recognized as a 501(c)(3) foundation.
Step 1: Incorporate. As a start, you will incorporate within the state you will run. Each state has a different process, but you will likely need to submit your articles of incorporation, identify board members, and pay a filing fee.
Step 2: Obtain an EIN. Once you’re incorporated, you will apply for an Employer Identification Number (EIN), which will be your foundation’s identity number (kind of like a social security number). To apply, you will need to complete IRS Form SS-4, which can be done online, through the mail, through fax, and even on the phone. Read more about the four ways you can submit your IRS Form here, and visit the IRS’ EIN page here.
Step 3: Apply for tax-exempt status. Finally, you will file for tax-exempt status with the IRS. To do so, fill out IRS Form 1023. You’ll provide information on your foundation’s structure, finances, and board of directors, and submit your articles of incorporation and bylaws. You will also be required to pay a filing fee. Learn more about IRS Form 1023 here.
When the IRS approves your application, you will receive a favorable determination letter certifying that your foundation is exempt from income tax.
Step 4: Celebrate! You’ve officially formed a 501(c)(3) foundation.
There are some annual forms that foundations are required to file to maintain foundation status. The number of forms differs based on the size and complexity of your organization.
As a start, read these two resources on the ongoing compliance of a foundation:
Here is an overview:
Again, be sure to visit this IRS page for a full listing of annual tax forms in the “required filing” section.
In addition to annual filings, you should be aware of crucial prohibited and restricted activities set by the IRS. Consequences and penalties of breaking these compliance issues should be taken very seriously.
Prohibited Foundation Activities:
Restricted Foundation Activities:
Managing a foundation is hard work. Here are a few more tips and resources to help your foundation succeed and thrive.
File990 is a cloud-based platform that offers an easy, fast, and safe way to electronically file your 990 forms. It communicates directly with the IRS to get information, quickly submit your forms, and receive acceptance.
CyberGrants is a cloud-based grant management software with numerous functions, including tax ID checking, accounts integration with payable systems, data scanning against watch lists, reporting automation, and automation of communication with grant seekers.
FluidReview by SurveyMonkey is a platform that manages and reviews a variety of applications, including scholarships, grants, and awards. The system helps organizations to collate and evaluate applications using file uploads and online forms.
Fluxx is a cloud-based grant management solution used for fellowships, grants, scholarships, donor-advised funds, and investments. The platform allows for grant and application management, budget and finance management, relationship management, donor tracking, data and workflow management, and reporting.
Submittable is a cloud-based submission management platform that simplifies the process of accepting, reviewing, and communicating with applicants. The platform is used to manage grants, scholarships, awards, and fellowships.
WizeHive Zengine™ grant management platform allows you to create application forms, manage submissions, share with board members or other reviewers, and capture and share your impact.
Check This: A Compliance Checklist for Private Foundations (Council on Foundations)
Complete Nonprofit Compliance Checklist (Wild Apricot)
Five Ways To Position Your New Foundation For Success (Forbes)
Life Cycle of a Private Foundation (IRS)
Starting a Foundation (Foundation Source)
State Links for Exempt Organizations (IRS)
Creating a foundation may seem daunting. It doesn’t have to be! We hope this step-by-step article empowers you to get started on your philanthropic adventure.
Tatiana Morand is the SEO & Content Manager at Wild Apricot, the #1 Membership Management Software for small organizations. When she’s not creating content to support revenue and membership growth, she’s drinking coffee and working on her fantasy novel.