How to Set Up a Charity Fund and Get Tax-Exempt Status

Establishing a charity fund formalizes philanthropic efforts, creating a structured, tax-efficient giving. These funds enable donors to support causes they care about. The process involves selecting the right fund type and navigating legal and regulatory requirements. This guide outlines procedures for establishing a charity fund and securing its tax-exempt status.

Understanding Charity Fund Options

Individuals and families have several options for structuring their charitable giving through a dedicated fund. Each type offers distinct characteristics and operational models, influencing donor involvement and administrative complexity. Exploring these options helps align the structure with philanthropic objectives and financial capabilities.

Donor-Advised Funds (DAFs)

Donor-Advised Funds (DAFs) are charitable giving vehicles administered by a sponsoring public charity. Donors contribute cash or assets, receiving an immediate tax deduction. Though the sponsoring organization controls the assets, donors advise on fund distribution to qualified charities and asset investment. Contributions are irrevocable, and assets grow tax-free within the fund.

Private Foundations

Private Foundations are independent legal entities established by an individual, family, or corporation, offering high control over charitable activities. They typically manage investments and grantmaking directly with their own board and staff. Subject to a more restrictive IRS regulatory regime, including payout requirements and potential excise taxes, private foundations suit donors seeking significant philanthropic involvement and a lasting legacy.

Supporting Organizations

Supporting Organizations are public charities designed to support other public charities. Their public charity status comes from their relationship with one or more supported organizations, aligning with their missions. Classified as Type I, Type II, or Type III based on their relationship and control, they can offer more favorable tax treatment than private foundations while providing a structured philanthropic approach.

Community Foundations

Community Foundations are public charities focused on improving local communities. They pool donations from individuals, families, and businesses to address community needs and support local nonprofits. Offering diverse grantmaking programs, including donor-advised funds, endowments, and scholarships, they allow donors to contribute to local causes without establishing a separate legal entity, leveraging the foundation’s expertise.

Establishing Your Charity Fund Legally

After selecting a charity fund type, the next step is legal establishment. This process is a prerequisite for seeking federal tax-exempt status and involves administrative steps and creating foundational documents.

Legal Entity Choice

Non-profit corporations and charitable trusts are common legal entity choices. A non-profit corporation is a separate legal entity, providing liability protection and governed by a board. A charitable trust is a legal arrangement where a trustee holds assets for charitable purposes, often offering more structural flexibility. Both require adherence to state regulations for formation.

Organizational Documents

Drafting organizational documents is crucial. For non-profit corporations, this includes Articles of Incorporation, filed with the state’s Secretary of State, outlining the organization’s name, purpose, initial board, and registered agent. Bylaws provide internal governance rules. For a charitable trust, a Trust Agreement defines its purpose, trustee powers, and asset management.

Obtaining an Employer Identification Number (EIN)

Obtaining an Employer Identification Number (EIN) from the IRS is mandatory after legal formation. This nine-digit number functions like a Social Security number for organizations, used for tax purposes, bank accounts, and grants. Apply for an EIN by filing Form SS-4, typically online for immediate issuance.

State Registration Requirements

State registration requirements must be met, usually by registering the non-profit corporation or charitable trust with the appropriate state agency, like the Secretary of State’s office. This ensures legal recognition within its operating jurisdiction. Some states may also require charitable solicitation registrations if the organization plans to solicit public donations, involving additional forms and fees.

Applying for Tax-Exempt Status

After legal establishment, apply for federal tax-exempt status under Internal Revenue Code Section 501(c)(3). This designation exempts the organization from federal income tax and makes contributions tax-deductible for donors. The IRS has specific criteria for 501(c)(3) qualification.

501(c)(3) Requirements

To be a 501(c)(3) organization, the entity must operate exclusively for exempt purposes, such as charitable, educational, religious, or scientific activities. No net earnings may benefit any private shareholder or individual, preventing private inurement. Additionally, 501(c)(3) organizations are restricted from intervening in political campaigns and limited in lobbying efforts.

Form 1023 Application

The primary application for exemption is Form 1023. This comprehensive form requires detailed information on the organization’s structure, purpose, and activities. Applicants must describe past, present, and planned activities, demonstrating alignment with exempt purposes. The form also requires governance information, including board details and potential conflicts of interest.

Financial Data Submission

Financial data is a substantial component of Form 1023. New organizations provide projected financial information (revenues and expenses) for three years. Existing organizations submit actual financial data for the past three to five years, plus a current balance sheet. This information helps the IRS assess operational viability and adherence to exempt purpose guidelines. Present this data clearly and accurately.

Required Attachments and Fees

Required attachments to Form 1023 include foundational documents like Articles of Incorporation or Trust Agreement, and Bylaws. A conflict of interest policy is also common. All Form 1023 applications must be submitted electronically via Pay.gov with a non-refundable user fee. As of late 2024, the Form 1023 fee is $600, and the streamlined Form 1023-EZ fee is $275. Form 1023-EZ is for smaller organizations with projected annual gross receipts under $50,000 and total assets under $250,000; certain entities like churches are ineligible.

Maintaining Compliance and Operations

After obtaining tax-exempt status, ongoing federal and state compliance is important to retain the designation. This involves consistent adherence to reporting requirements and sound operational practices. Diligent management ensures the organization continues its charitable mission effectively and responsibly.

Annual IRS Filings

Annual IRS filings are a primary responsibility. Most 501(c)(3) organizations must file an annual information return from the Form 990 series. The specific form depends on gross receipts and assets. For example, organizations with gross receipts below $50,000 may file Form 990-EZ, while larger organizations file Form 990. Those under $50,000 might file Form 990-N (e-Postcard). These forms report financial activities, governance, and operational information to the IRS.

State Compliance

Beyond federal requirements, state compliance is necessary. This often includes annual registration renewals with the state’s Secretary of State or equivalent agency. Organizations soliciting charitable contributions may also need to register with state charity officials and renew these registrations periodically. State-specific requirements vary widely and can involve separate reporting of financial and programmatic activities.

Record Keeping

Maintaining accurate and comprehensive records is fundamental for transparency and compliance. Organizations should keep detailed financial records (income, expenses, assets) consistent with GAAP. Legal documents, such as the IRS determination letter, Articles of Incorporation, and Bylaws, should be permanently retained. Board and governance records, including meeting minutes and resolutions, should be kept for at least seven years.

Governance and Contribution Acknowledgment

Sound governance and adherence to organizational policies contribute to effective operations. The board of directors or trustees oversees the fund’s activities, financial health, and strategic direction. Regular board meetings and adherence to policies like conflict of interest and whistleblower protection maintain accountability and integrity, ensuring decisions serve the organization’s charitable mission.

Proper acknowledgment of contributions is another ongoing responsibility. The IRS requires specific forms of acknowledgment for certain donations, especially those over a certain amount, to enable donors to claim tax deductions. Timely and accurate acknowledgments maintain donor trust and fulfill regulatory obligations.