How to Start a Nonprofit Foundation

By Stephanie Dube Dwilson

If you want to improve your community or meet a social need that no other local organization is pursuing, you might consider starting a nonprofit foundation. But make sure your foundation meets the requirements set forth by the IRS first. Rather than operating for profit, your organization's purpose should be for a social good.

If you want to improve your community or meet a social need that no other local organization is pursuing, you might consider starting a nonprofit foundation. But make sure your foundation meets the requirements set forth by the IRS first. Rather than operating for profit, your organization's purpose should be for a social good.

Foundation Definition

A nonprofit private foundation is a default categorization given by the IRS to all charitable organizations that have 501(c)(3) nonprofit status but don't qualify to be public charities. These private foundations work for the public good, often by helping educational, religious or community activities, and they frequently give grants to other nonprofits. Nonprofit foundations get most of their contributions from a few sources, including investment earnings, while public charities tend to get their contributions from grants, the government and other nonprofits. It is easiest to define a nonprofit foundation by what it is not: a private foundation is a nonprofit that is not a public charity, and charities include churches, medical research organizations, hospitals, schools and universities. For example, a nonprofit foundation could be an organization focused on helping educate people with learning disabilities but is not itself a school.

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State Filing

When you want to start a nonprofit foundation, make sure that you file all the paperwork required by your state in order to operate as one. The exact forms needed will vary from state to state, and you can check with your secretary of state's office to find out specifically which forms you'll need. You can likely download these forms from your secretary of state's website and third-party legal websites. Typically, you will need to register your foundation's name as well as file your foundation's Articles of Incorporation with your state.

Federal Tax Filing

A key benefit of registering as a nonprofit is acquiring federal tax-exempt status. You'll need to fill out quite a bit of paperwork to achieve this. Publication 4220, available on the IRS website, gives details on how to apply for 501(c)(3) tax exempt status. This will free your foundation from being taxed on its income. To qualify, your foundation must operate solely for 501(c)(3) purposes, its earnings can't benefit one individual and a substantial part of its activities can't be focused on campaigning or influencing legislation. Qualifying 501(c)(3) purposes include charitable, scientific, literary, public safety, amateur sports, and preventing cruelty to children and animals. You will need to file Form SS-4 to get an employer identification number and Form 1023 to specifically apply for exemption. When the IRS awards you tax exempt status, it will send you a tax determination letter.

State Tax Exemption

You will also want to get tax exempt status from your state, but you won't qualify for this until after your foundation receives tax-exempt recognition from the IRS. The specific rules will vary by state, but you will likely need to register as a charitable organization with the secretary of state's office. In Maryland, this involves filling out an Exempt Organization Fund-Raising Notice. In Arizona, you have to file an exempt notice as well as an annual report with the secretary of state before receiving any charitable donations, and then you have to file again every September. Some states require an additional registration with the state's Department of Revenue in order to be exempt from state taxes.

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501(c)(3) Types

References

Resources

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To qualify for tax exemption under Section 501(c)(3) of the Internal Revenue Code, your club must have an "exempt purpose". If your club meets one of the required purposes, you may apply to be recognized as a non-profit, tax-exempt organization. To apply for this recognition, additional filings above and beyond initial incorporation filings may be required at the state level, and will be required with the IRS.

How to Find 501(C)(3) Tax Exempt Companies

To obtain a 501(c)(3) tax exempt status, most nonprofit companies must file documents with the IRS proving they operate for certain charitable purposes specified by statute. Internal Revenue Code 501(c)(3) includes groups whose purposes are charitable, educational, religious, scientific, literary or supporting national or international amateur sports competitions, the prevention of cruelty to children or animals, and testing that applies to public safety. Contributions to 501(c)(3) organizations, with the exception of those that test for public safety, are deductible as charitable donations for federal income tax purposes. With the help of a number of federal and state government websites, as well as private websites, there are several ways to verify the exempt status of a nonprofit.

Rules & Regulations for Non Profit Foundations

Nonprofit foundations that meet certain requirements are eligible for special tax treatment by the IRS under Section 501(c)(3) of the Internal Revenue Code. Donors to such organizations enjoy tax benefits as well. Most nonprofit organizations must apply for 510(c)(3) status before taking advantage of its benefits. Under certain circumstances, however, the IRS may revoke a nonprofit foundation's status.

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