How to Start a Private Foundation Step-by-Step

A private foundation is a legal entity established for charitable purposes, typically funded by a single source like an individual, family, or corporation. Unlike public charities that rely on broad public support, private foundations maintain a closer connection to their founders. This allows founders to direct charitable contributions toward specific causes and create a lasting legacy. Establishing a private foundation involves steps from defining its core mission to securing federal tax-exempt status.

Defining Your Foundation’s Purpose and Structure

Establishing a private foundation begins with articulating its charitable purpose and organizational framework. Defining a mission and vision guides all future activities. A mission statement specifies what the organization does, for whom, and its intended impact, serving as a practical guide. A vision statement describes the future the organization aspires to create. These statements should reflect the core issues the foundation aims to address and its long-term objectives.

Choosing the appropriate legal structure is important, with options being a charitable trust or a non-profit corporation. A charitable trust often presents a simpler, less formal governance structure, where assets are managed by trustees according to the trust agreement. This option offers flexibility for founders who prefer a more direct management style without extensive corporate formalities. A non-profit corporation provides a more formal structure with a board of directors, requiring adherence to corporate governance rules and state-specific filing requirements. This corporate form offers greater liability protection and a more traditional framework for organizational oversight.

Selecting a suitable and available name for the foundation is important, as it will represent the organization publicly and legally. The chosen name should align with the foundation’s mission and be unique within the state where it will be formed. Checking for name availability with the relevant state authority is necessary before formalizing the legal structure. Identifying and outlining the roles of initial board members or trustees is also an important preparatory step. These individuals will be responsible for governing the foundation, making their expertise and commitment to the mission important.

Funding considerations must be addressed early in the planning process. This involves determining the initial source and amount of assets that will endow the foundation. Understanding the initial asset base helps in planning the foundation’s capacity for grantmaking and operational expenses. While asset transfer mechanics come later, the decision to fund and the initial asset amount are determined at this conceptual stage.

Establishing Your Foundation Legally

Creating the legal entity for a private foundation at the state level involves preparing and filing specific organizational documents and establishing internal governance. The foundational legal document for a corporate structure is the Articles of Incorporation, while for a trust structure, it is a Trust Agreement. These documents must clearly state the foundation’s purpose, identify its initial directors or trustees, and include a dissolution clause specifying that assets will be distributed to another qualifying 501(c)(3) organization if the foundation ceases to exist. These elements are important for demonstrating the organization’s charitable intent and ensuring compliance with federal tax law.

Once drafted, these organizational documents must be filed with the appropriate state authority, typically the Secretary of State. This formally establishes the legal existence of the private foundation within the state. Filing fees and specific submission requirements vary by state, requiring careful attention to local regulations.

After state formation, obtaining an Employer Identification Number (EIN) from the Internal Revenue Service (IRS) is a necessary step, even before applying for federal tax-exempt status. The EIN is a unique nine-digit number used by the IRS for tax filing and reporting purposes, and it is required for opening bank accounts and other financial transactions. An EIN can be obtained by completing Form SS-4, Application for Employer Identification Number.

Beyond the foundational legal documents, internal governance documents are developed to guide the foundation’s operations. For a corporate foundation, bylaws are drafted to outline internal rules, such as procedures for board meetings, duties of officers, and responsibilities of the board members. For a trust, equivalent operating procedures serve a similar purpose, defining the roles of trustees and decision-making processes. These internal documents are important for establishing clear operational guidelines and ensuring proper oversight.

The initial organizational meeting of the board or trustees is a significant event in the foundation’s legal establishment. At this meeting, the board formally adopts the bylaws or trust agreement, elects officers, and passes initial resolutions, such as authorizing the opening of bank accounts. Proper minutes of this meeting must be recorded to document these foundational decisions, providing a legal record of the organization’s initial actions. This meeting lays the groundwork for the foundation’s ongoing governance and operations.

While the primary legal steps involve formation and EIN acquisition, some states may have additional initial registration requirements. For instance, charitable solicitation registration might be necessary if the foundation plans to solicit funds from the public. These additional state-level registrations must be fulfilled to ensure comprehensive legal compliance.

Applying for Federal Tax Exemption

Securing federal tax-exempt status allows a private foundation to operate without federal income tax and enables donors to receive tax deductions for their contributions. All organizations seeking 501(c)(3) status must be organized and operated exclusively for charitable, educational, religious, or other exempt purposes, ensuring no part of their net earnings benefits private interests. Private foundations are subject to additional rules under the Internal Revenue Code, including restrictions on self-dealing, a requirement to annually distribute a minimum of 5% of their asset value for charitable purposes, limitations on business holdings, prohibitions against speculative investments that jeopardize charitable purposes, and taxes on certain expenditures.

The application for this status is primarily done through IRS Form 1023, Application for Recognition of Exemption Under Section 501(c)(3). Gathering the information and documentation required for this form is a detailed process. A narrative describing the foundation’s past, present, and planned activities is necessary, detailing how these activities align with its charitable purpose and contribute to its exempt function. This narrative helps the IRS understand the scope and nature of the foundation’s work.

Detailed financial data must also be provided, including actual income and expenses for any past operating periods, and projected financial information for at least three years. This includes breakdowns of revenue sources, expenditure categories, and a balance sheet reflecting assets, liabilities, and net assets. The IRS scrutinizes these financial projections to assess the organization’s operational viability and its commitment to charitable activities.

Information regarding compensation policies for officers, directors, and highly compensated employees is another important component of Form 1023. The IRS requires assurance that compensation is reasonable and not excessive, as serving private interests excessively can jeopardize tax-exempt status. A written conflict of interest policy is also required, detailing how potential conflicts will be identified and managed to protect the foundation’s interests. This policy outlines procedures for disclosing conflicts, recusal from voting, and ensuring decisions are made in the organization’s best interest.

The organizational documents, such as the Articles of Incorporation or Trust Agreement, and internal governance documents like the Bylaws, must be submitted as part of the Form 1023 application. Any other required attachments or schedules specific to private foundations must also be included. The focus during this information gathering stage is on compiling accurate, complete, and consistent data that directly supports the foundation’s eligibility for 501(c)(3) status as a private foundation.

Once all information is gathered, completing Form 1023 demands attention to detail. The form, along with all supporting documents, must be submitted electronically through Pay.gov. A non-refundable user fee of $600 is required for Form 1023, which must be paid through Pay.gov at the time of submission.

After submission, the IRS begins its review process. Processing times can vary, ranging from a few months to over a year, depending on IRS workload and the complexity of the application. During this period, the IRS may issue a Request for Additional Information (RFI) if clarification or further documentation is needed. Responding promptly and thoroughly to an RFI is important to avoid delays.

If the application is approved, the IRS will issue a determination letter, officially recognizing the foundation’s 501(c)(3) tax-exempt status and its classification as a private foundation. The effective date of exemption is retroactive to the date of the foundation’s legal formation.