A foundation is a private nongovernmental organization created for “charitable, educational, religious, scientific and literary purposes,” according to Section 501(c)(3) of the IRS Code. It’s organized by a single source—like a family or corporation—which then distributes grants to help fund other nonprofits.
There are three key differences between a public charity and a private foundation:
- A foundation is generally sustained through private investments, securities and other funds, not donations from the public.
- While nonprofits provide some kind of charitable good or service to the people they assist, a private foundation exists for one reason and one reason only: money. Although their grants usually support nonprofit activities, foundations don’t directly participate in the programs or services themselves.
- Private foundations are exempt from income tax, just like other nonprofits. However, they are subject to a one or two percent excise tax on income generated by investments.
So, if your nonprofit is doing a stellar job already and is looking for another way to give to the community, creating a foundation might be the right solution for you.
But be warned: it takes a lot more than just money. We’ll give you all the tools you need to start a foundation, and, more importantly, maintain it.
1. Legal stuff
First of all, you need to decide whether or not you want to hire an attorney for the legal process or do it all yourself. We’d strongly recommend hiring an attorney, but if you’re good at this kind of thing and want to save money, go for it. You should also check with your Secretary of State’s business office for the exact steps, but, in general, here’s what you need to do.
First, do a quick search to make sure that your proposed foundation name is not registered to another corporation.
Then, you’ll need to fill out the Articles of Incorporation, which are the legal documents that make your foundation legitimate—like a business plan, but for nonprofits. If you’re doing this without an attorney, you can find plenty of templates online.
Next, you’ll need to create bylaws for your foundation, which outline how you plan to select your board, avoid conflicts of interest, manage your funds, etc. Some states don’t require bylaws, but it’s always smart to have them anyway for contractual and organizational purposes. Once you have this paperwork completed, turn it all in to the IRS in order to qualify for tax exemption (you’ll have to pay a few legal fees).
2. Get on board
Now that you’ve set up your foundation, you’re going to have to maintain it well. A crucial part of this is selecting the right board members. Some foundations choose to fill their boards with close friends and family members. While this will make your foundation close-knit and personal, it can also limit fundraising. If you rely on outsiders, like experts within the field or independently wealthy people who are passionate about your cause, you’ll receive bigger donations and more networking opportunities. In doing this, however, you’ll sacrifice some of that intimacy. So, it’s up to you to feel out your foundation’s specific needs and choose your board accordingly.
Unless you have a steady funding source or a principal investment (i.e. an endowment), you’ll need to fundraise to keep your foundation afloat. Since you already run a nonprofit, chances are you’re pretty good at this. Crowdfund online, host an event, send an email—you know the drill. But however you choose to fundraise, make sure you’re always budgeting and planning for the months ahead.
4. Manage your money
This is important: you must keep your foundation entirely separate from your nonprofit, otherwise things could get messy. Even if the funds are going primarily to your nonprofit, there’s a right and a wrong way to do this. You need to be sure the two entities remain completely independent from each other, so ask an attorney for help if you’re concerned they might somehow be overlapping.
Voila! You’re now ready to not only create a foundation for your nonprofit, but sustain it, too! Your new private organization will help you give back to your community more than ever before. Congrats!