Private foundations are independent legal entities that are typically funded by individuals, groups, or businesses. A person might want to start a foundation for various reasons: to be philanthropic, to expand their brand, to expand giving opportunities, and to take advantage of tax laws.
When creating a private foundation, the first step is to define the foundation’s purpose. The foundation must benefit the public in order to obtain and maintain tax-exempt status. Next, the structure should be considered. The foundation can be a charitable trust or a nonprofit corporation. Nonprofit corporations limit personal liability, whereas charitable trusts do not. However, charitable trusts have looser operating requirements and are easier to establish. With a trust, a foundation would need to appoint trustees. With a corporation, the foundation then needs to write bylaws and articles of incorporation and file with the state. Finally, with either type of foundation, the foundation needs to file with the Internal Revenue Service (IRS) for an employer identification number (EIN) and tax exempt status, as well as file with the state for tax exempt status.
Private foundations need to ensure they have enough funds to operate. Foundation Source recommends at least $250,000 in assets to start a private foundation. According to IRS data, 66% of private foundations have assets under $1 million. Donor contributions to foundations are tax deductible.
Once in business, private foundations must give 5% of previous year’s net average assets in donations, which are considered grants. Foundation grants must be made only to other nonprofits or can be made to individuals for specific exceptions like scholarships. Foundations must prevent individual organizations from receiving too many benefits, as well as letting insiders accumulate too many assets or get overpaid. Private foundations cannot partake in political campaigns or lobbying.
For questions or more information about starting a private foundation, please contact Dan Kelley at 301.231.6200.