How to Start a Nonprofit Foundation

By Lee Hall, J.D.

How to Start a Nonprofit Foundation

By Lee Hall, J.D.

A private foundation is a nonprofit entity. Under Internal Revenue Code section 508, the default classification for a nonprofit is the private foundation. To be a public charity, the nonprofit would need to meet an exception in section 509(a) of the code. The Internal Revenue Service (IRS) explains this in detail in its Compliance Guide for 501(c)(3) Private Foundations.

Man typing at desk with sign that says "non profit" next to him

Like a public charity, the foundation commits itself to the public good, but a foundation operates privately in pursuit of its goals or provides grants and funds to public charities. Thus, when establishing a private foundation, you might set up an operating foundation, which pursues its mission through its own operations. Alternatively, you may establish a foundation that supports other charities through grants. You may also want to consult an experienced nonprofit attorney as you make these decisions and begin the formation process.

Financial Considerations

Before you are ready to apply for nonprofit status, you need to work out the likely costs to carry out the future foundation's effective management, the pursuit of its mission, and its compliance with various legal requirements and reporting rules. Penalties for lapses are significant. If a private foundation neglects to file a Return of Private Foundation or Section 4947(a)(1) Trust Treated as a Private Foundation (Form 990-PF) for three years, the IRS revokes its 501(c)(3) status.

In your foundation's business plan, develop a marketing strategy and an initial three-year budget. Factor in charitable spending of at least five percent of the entity's assets. Research explained by the Council on Foundations shows most private foundations with between $5 million and $10 million in assets have part-time staff only, as they hold administrative costs below the recommended 15 percent ceiling.

Formation in the State

A foundation typically forms in the state where it intends to base its operations. You have the option to form your foundation as a trust. Yet, incorporating a nonprofit protects directors from personal liability. The nonprofit corporation model serves most foundation purposes.

Forming a corporation involves naming the entity and carefully drafting articles of incorporation and bylaws. The bylaws set out rules for board selection, board meetings, the direction of the foundation, and conflict-of-interest policies.

Foundations register with the state agency that regulates business, normally the Secretary of State. Some states—for example, Delaware—require the foundation to also register with the state departments of labor and revenue. The private foundation also files Form 990-PF, as previously mentioned, with the state's Attorney General. Check your own state's requirements. This includes your state of incorporation and wherever your foundation conducts its business. Be aware that most states do have a "charitable solicitation registration" rule that means a nonprofit must register prior to fundraising or soliciting within them.

Obtaining IRS Nonprofit Status

Once established under state law, the foundation applies for a 501(c)(3) designation to make its income tax-exempt and to qualify to accept tax-deductible contributions. Know that your Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code (Form 1023) will be a publicly available document.

Once the IRS sends you a letter classifying your entity as a private foundation, file the Application for Employer Identification Number (Form SS-4).

Continual Compliance with Pertinent Regulations

Nonprofits need to manage funds properly and prevent conflicts of interest, such as using the foundation to advance business purposes. The foundation's income may not benefit any member or private stockholder.

Nonprofits are not vehicles to engage in political campaigns. This is to comport with the "Johnson Amendment"—so named because Lyndon B. Johnson introduced this provision into the tax code. Foundations must not work to influence the outcomes of political campaigns for or against any political candidate.

Some restrictions exist on grantmaking to individuals or taxable entities. In addition to developing criteria for selecting funding recipients, be sure to review each grant for compliance with IRS requirements.

The IRS is the federal regulatory body for nonprofits, including nonprofit foundations. At the state level, the state's Attorney General usually regulates nonprofit activities.

Always keep abreast of what activities are improper for the foundation. A foundation carries out its duties on behalf of the public good and must always act accordingly.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.