Looking to establish a private foundation? Then this article is for you. Below is a simple step-by-step guide on how to start a foundation.

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A private foundation is a corporation characterized by being nongovernmental and nonprofit. As per section 501(c)(3) of the IRS Code, a foundation is created exclusively for charitable purposes in educational, literary, scientific, and religious domains.

A foundation can be started via an individual, a family, or a corporation to make out grants or donations to other nonprofit institutions. Below are a few key features of a private foundation:

It receives funding through cash, securities, or other assets investments from the founder.

Its main activity is to provide nonprofits with funding to support their ventures. 

Just like other nonprofit organizations, private foundations don’t pay income taxes. 

Step 1: Understand the Concept of a Foundation

Determining the purpose(s) of your foundation is a crucial step for a successful setup process. So, take a moment to carefully think about why you want to start the foundation. Here are a few common reasons:

Tax benefits — these can be quite attractive, even for individuals. You can donate as much as 30% of your yearly income to the foundation and get a tax deduction.

Assume better control over the philanthropic activities — as the founder, you get almost total control over the management of the funding and the charities that receive your support.

Supporting a special cause — this could be something dear to your heart that you want to further boost. 

Step 2: Determine the Purpose of the Foundation

When starting a foundation, it's important to identify what sort of charitable work you're looking to be involved in. While some founders just know what their calling is right away, it's completely okay if you need to take a bit of time to figure things out.

You don't have to be super particular about it if you don't want to; many private foundations are pretty general about their funding. That being said, most foundations do focus on specific causes, topics, or geographic regions.

Before you make a final decision, do your homework. Research your area to get an idea of what it lacks or needs, and see what other involved foundations are doing in those domains.

Step 3: Identify What You Want to Fund

To start a private foundation, you must incorporate it in the state where its practice will take place. You can do this yourself or save yourself the hassle and hire a lawyer to do it for you.

The requirements for incorporation differ from one state to another, so be sure to check with your state's business office to find out the specifics of the procedure. Here's a general overview of the procedure:

Verify that your foundation's proposed name is available.

Prepare Articles of Incorporation documents.

Appoint at least 3 members to the board of directors.

Step 4: Incorporate the Foundation

By-laws are the governing rules of an organization's internal operation. They set up the regulations for choosing board members and terms, as well as determine the foundation's fiscal year.

By-laws are a requirement for nonprofits in some states, but not all of them. So, be sure to check this aspect with your Secretary of State's office.

Step 5: Draw Up By-Laws

This type of policy is to handle cases where the personal interest of one of the organization’s board members or officials is in conflict with the foundation’s best interest. A common example of such cases is when the foundation hires a board member's firm to do services for it.

The money transactions here aren’t necessarily illegal; they can be totally legit as long as the decision was objectively assessed and found to truly benefit the foundation.

A policy for conflict of interest dictates the following:

No or limited transactions if there’s a potential conflict

Board members must report potential conflicts

Board members should abstain from making decisions involving personal interests 

Step 6: Prepare a Policy for Conflict of Interest

The funding guidelines of your foundation regulates the distribution of funds over its areas of interest and sets rules for whether or how organizations can apply for grants from the foundation. A few points to include in these guidelines are:

Your selection of organizations or charities that’ll receive grants.

If you decide to take in funding applications, you should describe how this process will go and what’s required from the applicants.

Determine the amount/limit of your grants.

Come up with a schedule for the frequency of reviewing applications and proposals. 

Step 7: Establish Guidelines for Funding

An EIN (Employer Identification Number) is pretty much a business’s social security number. The government and related agencies use this number to identify your foundation.

You should apply for an EIN even if you don't plan on hiring employees in your foundation. It’s free of charge to get an EIN, and there are a few ways to do it:

Download and fill an SS-4 IRS form called “Application for Employer Identification Number”. Once the paperwork is processed, you’ll receive your EIN in the mail.

Contact the Business & Specialty Tax Line of the IRS.

Step 8: Get an EIN

Applying for the IRS is a must to receive the status of tax exemption. You’ll mainly need to file a form where you share information about your foundation’s organization, activities, board of directors, financial aspects, and more details.

Additionally, you may be asked to include your grant-issuing guidelines and other organizing documents. You’ll also need to pay a fee.

Step 9: File Your Paperwork IRS

When tax exemption is on the line, expect the IRS to ask you a bunch of follow-up questions. This is quite common so don’t be discouraged by it and just be open to it by preparing yourself to provide thorough answers.

Step 10: Be Open to Questions

There you have it, a simple step-by-step guide on how to start a foundation. As you can tell, the process requires some serious thought and can take a while to complete, but it’s eventually quite rewarding as long as you’re in it for the right reasons.

How To Start A Foundation

Step 1: Understand the Concept of a Foundation

Step 2: Determine the Purpose of the Foundation

Step 3: Identify What You Want to Fund

Step 4: Incorporate the Foundation

Step 5: Draw Up By-Laws

Step 6: Prepare a Policy for Conflict of Interest

Step 7: Establish Guidelines for Funding

Step 8: Get an EIN

Step 9: File Your Paperwork IRS

Step 10: Be Open to Questions

Conclusion

How To Start A Foundation

Step 1: Understand the Concept of a Foundation

Step 2: Determine the Purpose of the Foundation

Step 3: Identify What You Want to Fund

Step 4: Incorporate the Foundation

Step 5: Draw Up By-Laws

Step 6: Prepare a Policy for Conflict of Interest

Step 7: Establish Guidelines for Funding

Step 8: Get an EIN

Step 9: File Your Paperwork IRS

Step 10: Be Open to Questions

Conclusion

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