How to Start a Private Family Foundation

A private family foundation is a charitable organization established and funded by an individual or family to support philanthropic causes. It allows the founding family to maintain control over charitable activities and grant-making decisions, serving as a vehicle for organized giving and a lasting philanthropic legacy. While offering control and potential tax benefits, it also entails administrative responsibilities and legal compliance.

Establishing the Legal Entity

The first step in creating a private family foundation is establishing its legal structure, either as a not-for-profit corporation or a charitable trust. Both are treated similarly for federal tax purposes but offer distinct operational and governance characteristics. A not-for-profit corporation provides more flexibility, allowing the board to amend bylaws or redefine the charitable purpose. A charitable trust offers higher control, as its provisions are more restrictive and may require court approval for changes, safeguarding the founder’s original intent. Corporate structures offer better liability protection for directors and officers than trusts.

Choosing a name is an early consideration, often reflecting the founding family or honoring individuals to establish identity and purpose. Legal availability must be verified through the state’s Secretary of State office. The chosen name and legal structure are fundamental to the foundational legal documents.

Creating foundational legal documents is an important phase. For a corporate structure, this involves drafting Articles of Incorporation and Bylaws. Articles of Incorporation, filed with the state, establish the entity and must include the foundation’s purpose, initial directors, and a statement dedicating the organization to charitable purposes. Bylaws provide internal rules for operation, including governance, meeting procedures, and officer duties.

For a trust structure, a Trust Agreement or Declaration of Trust is prepared. This document outlines the gift, names initial trustees, defines their powers and duties, and specifies charitable beneficiaries or purposes. Both corporate bylaws and trust agreements should include dissolution and non-inurement clauses.

Obtaining an Employer Identification Number (EIN) from the IRS is an early, necessary step. An EIN functions as a federal tax ID number, required for opening bank accounts, filing tax-exempt status applications, and all future tax filings. It can be applied for online through the IRS website, requiring basic information about the foundation and its responsible party.

Obtaining Federal Tax-Exempt Status

Securing federal tax-exempt status begins with filing IRS Form 1023, Application for Recognition of Exemption Under Section 501(c)(3). This form requires detailed information on the foundation’s organizational structure, charitable purpose, and activities, demonstrating how it will fulfill its exempt purpose.

Form 1023 requires financial data, including actual and projected income and expenses. This includes a statement of revenues and expenditures for past years, if applicable, and a projected budget for the next three to five years. It also asks for information on compensation of officers, directors, and trustees to ensure compliance with private inurement rules.

Form 1023, with instructions and schedules, can be downloaded from the IRS website. Accurate completion of informational fields is important, as the IRS scrutinizes applications. Providing clear, complete, and consistent information helps avoid processing delays.

Once Form 1023 is prepared, submission begins. The application, including all required schedules and attachments, is submitted electronically through Pay.gov, though mailing instructions may be available. A user fee of $600 is required at submission, payable from a bank account or by credit/debit card.

After submission, the IRS provides a confirmation receipt. Processing times vary; for Form 1023, it can take three to twelve months or longer due to application complexity and volume. The IRS may request additional information. Once reviewed, the IRS issues a determination letter recognizing the foundation’s tax-exempt status under Section 501(c)(3). Expedited processing is possible only in specific circumstances, such as a contingent grant expiring without prompt 501(c)(3) status.

Fulfilling State Registration Requirements

Beyond federal tax-exempt status, private family foundations must fulfill state registration requirements. The first step involves filing Articles of Incorporation or a Trust Agreement with the Secretary of State or similar state agency where the foundation is established. This officially registers the foundation as a legal entity within that state, separate from federal tax exemption.

Many states require charitable solicitation registration if the foundation solicits funds from residents. Requirements vary by state, encompassing different forms, fees, and reporting schedules. While the Uniform Registration Statement (URS) was developed to simplify multi-state solicitations, it is not universally accepted, and many states still require state-specific forms or additional attachments. Research specific requirements for each state where the foundation plans to operate or solicit contributions.

Failure to register properly can lead to penalties or fundraising restrictions. Some states may require a registered agent to receive legal and government notices. Foundations must complete ongoing annual state filings, including submitting annual reports to the Secretary of State or renewing charitable solicitation registrations. These obligations ensure compliance with state regulations and maintain the foundation’s good standing.

Ongoing Operational Requirements

Maintaining a private family foundation involves adherence to operational and compliance requirements once its legal structure is established and federal tax-exempt status is granted. The annual obligation is filing IRS Form 990-PF, Return of Private Foundation. This form is distinct from Form 990 filed by public charities and is mandatory for all private foundations, regardless of financial activity or asset size. Form 990-PF reports the foundation’s financial activities, including income, expenses, investment details, and grants made during the year. The filing deadline is the 15th day of the fifth month following the close of the foundation’s fiscal year; for calendar-year foundations, this is May 15.

Record keeping is important for transparency, compliance, and efficient operations. This includes detailed records of financial transactions, grantmaking activities, and board meeting minutes. Records are important for preparing the annual Form 990-PF, supporting financial audits, and demonstrating adherence to the foundation’s charitable purpose. Founding papers and legal documents should be preserved permanently, while financial records like bank statements and invoices are retained for at least seven years.

Developing clear grantmaking policies and procedures is an important operational aspect. These policies should outline the process for soliciting or receiving grant applications, review and approval criteria, and expectations for grantee reporting and evaluation. Such procedures ensure fair, consistent grantmaking practices aligned with the foundation’s mission.

Responsible investment management of the foundation’s endowment is a responsibility. Managers must adhere to prudent investment principles, considering long-term financial needs and diversifying assets. Private foundations are subject to specific IRS rules, including prohibitions against self-dealing (transactions between the foundation and its disqualified persons) and jeopardizing investments. Jeopardizing investments are those made without ordinary business care and prudence that risk the foundation’s charitable purpose. Violations can result in excise taxes on the foundation and its managers.

Ongoing governance involves regularly convening board meetings to review financial statements, approve grants, and discuss strategic direction. Adherence to the foundation’s bylaws or trust agreement is important, ensuring decisions and operations align with governing documents. Compliance with federal and state laws is necessary to maintain tax-exempt status and uphold public trust.