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.

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.

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.

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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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How to Start a 501(c)(3) Nonprofit Rescue
 

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501(c)(3) Types

Federal taxes are a significant expense for many businesses, but not for exempt non-profits. Non-profit charities that are organized under Internal Revenue Code Section 501(c)(3) are generally tax-exempt, and their donors usually get tax breaks for supporting them. The IRS divides these charities into two categories: public charities and private foundations.

How to Create a 501C3 in California

Although a somewhat cumbersome process, properly registering your organization as a 501(c)(3) nonprofit allows it to benefit from tax-deductible donations and exemption from certain state and federal taxes. Nonprofits are initially formed at the state level, while the Internal Revenue Service regulates 501(c)(3), or exempt, organizations. As such, a nonprofit must pursue both state and federal registration in order to receive the most benefits.

How to Incorporate a New Church in Indiana

Federal and state tax relief is available to churches that are formed as nonprofit corporations in Indiana. This treatment can be vital to the survival of the church, as donations typically make up a large portion of the operating budget. The state requires certain initial filings to form the nonprofit. Afterward, your church must pursue tax exempt status at the federal level. Once the Internal Revenue Service approves you application, you may obtain the state exemptions.

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