Forming a Foundation: Essential First Steps & Forms to File

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:

  • Significant tax deduction
  • Create a legacy for yourself or a loved one
  • Support causes you’re passionate about with tax-deductible grants
  • Control over where your funds go
  • Involve your family in giving back to the community

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.

Three Parts to Forming and Maintaining a Foundation

1. Get Organized

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.

2. Make it Official

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.

3. Ongoing Compliance

Annual Foundation Forms to File

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:

  • Return of Private Foundation, or IRS Form 990-PF. Form 990-PF is a detailed financial report of your foundation’s activities and is required to be submitted on an annual basis. Learn more about Form 990-PF here.
  • Unrelated Business Income Tax, which includes several 990 forms, called the 990 series.
  • Annual filings required by your state.

Additional Possible Forms

Again, be sure to visit this IRS page for a full listing of annual tax forms in the “required filing” section.

Compliance Issues To Be Aware Of

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:

  • Allowing more than an insubstantial accrual of benefits (including non-monetary) to individuals or organizations.
  • Allowing income or assets to accrue to insiders (ie, giving an unreasonable salary to a director).
  • Participating in any political campaign on behalf of a public office candidate, including campaign contributions and making official public statements.

Restricted Foundation Activities:

  • Self-dealing with disqualified persons, including substantial contributors, foundation managers, and certain other related persons.
  • Investments that may jeopardize carrying out exempt purposes.
  • Lobbying through actions or spending.

More Tips and Resources

Managing a foundation is hard work. Here are a few more tips and resources to help your foundation succeed and thrive.

Top Foundation Management Tips

  • Consider hiring legal and accounting professionals to help set up and maintain filing and compliance matters. They’re the experts on the complexities of foundation compliance.
  • Keep reliable records of your finances, contracts, and operations. Good recordkeeping will serve the future of your foundation very well.
  • Publish annual reports. This allows you to be transparent and show your stakeholders your impact.
  • Keep up with your foundation’s issues. Be as knowledgeable about your cause as the organizations you fund.
  • Seek out partners and allies in your community and network. It takes a village to change the world.

Foundation Management Software

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.

Key Foundation Resources

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 from Wild Apricot wrote this article on how to create a foundation. Author: Tatiana Morand

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.