National Center for Charitable Statistics

The Nonprofit FAQ

How to start a foundation
On Wed, 10 Oct 2001, Jane Doe wrote:

What does it take to start a foundation? I would like to start a
foundation. Do I need a business plan and how I plan to disburse funds to a local non profit?

Is there a check list some place it seems rather daunting, I have
been at the Secretary of State's site and see a list. How long does it usaully take?

Putnam Barber offered this reply:

Well, as with many things, it depends....

Mostly, it depends on what you want to do.

If you have funds of your own that you plan to use to endow the
foundation, then it can be very simple. I'd start down that path by talking with staff at the appropriate community foundation. Unless you have a lot of money to put into this (more than $5,000,000 is what I've heard people say, and they usually follow that with something like "it's better with a lot more), you will probably find that the community foundation can arrange a donor-advised fund for you that will allow you a good deal of flexibility, handle all the administrative tasks for far less
cost than you would incur, and can all be done in a few days. (There are similar services offered by major financial institutions; you might want to compare services and fees.) There are lists of community foundations at The Grantsmanship Center (http://www.tgci.com/resources/foundations/community/)
and the Foundation Center (http://fdncenter.org/funders/grantmaker/gws_comm/comm.html).

If you are planning to raise money to support your foundation, then it is a great deal more complicated. You might still be able to use a donor advised fund at a community foundation, but you would need to ask them about the requirements if you want to raise money from other people to put into "your" fund.

Or you can, as your question suggests, set up a separate foundation. This process is likely to take several months to a couple of years, depending on many intricacies that only someone who knows your plans, goals and local conditions can really estimate for you. It is also likely to cost several hundred to a few thousand dollars, depending on how much outside advice you need, want and use.

The rules about incorporating foundations vary from state to state. You will need to incorporate as a first step; everything else follows from that. Incorporation can be very simple to do, but it needs to be done exactly right to avoid problems later on down the road.

For example, In order to be eligible to receive tax-deductible donations, you will need to be sure your corporation meets the requirements the IRS has developed to implement the Internal Revenue Code, especially section 501(c)(3) -- and there are many other things to think about while setting up the corporation in the first place.

The you will need to apply for recognition as a tax-exempt entity under federal tax laws. The form for doing that is IRS 1023; there's a publication you can get from the IRS, or download from www.irs.gov, called "Tax Exempt Status for My Organization" (pub. 557), that explains a lot of this. For this step, you will indeed need a business plan (since you have to provide a budget, including details of the sources and uses of funds, for the first three years of your planned program).

Foundations are governed by similar regulations for federal tax and reporting purposes to those that apply to the more familiar "public charities" -- the organizations that we all know as "nonprofits." But the prohibitions on self-dealing are more stringent and all foundations have to pay an excise tax.

As a fundraiser, you will probably also have to register with and report to your state's charity officials (usually in the Secretary of State's office -- see http://www.multistatefiling.org for information about this subject.

Another option, especially if you are planning to assist just one or a small number of nonprofits through your foundation, would be to work out an agreement that allowed you to operate as a "program" of some established organization. You would be subject to the overall direction of the sponsoring organization's board, but the agreement could allow substantial flexibility and scope for you to work on your cause without having to meet the administrative requirements foundation status would impose. This structure often goes under the name of "fiscal sponsorship."

The "Start-up" section of the Nonprofit FAQ has lots of information about all these subjects, and pointers to further information as well. See http://www.idealist.org/if/i/en/faqcat/2-4 and click on Start-up among the index entries.

(If by any chance you're in Washington state, you'll want to get hold of the King County Bar Association's very useful workbook "How to Form and Manintain a Nonprofit Organization" -- see
http://www.wsba.org/lawyers/groups/businesslaw/nphandbook.doc. Many other states have statewide associations of nonprofits who can connect you with local resources; for a list see http://www.councilofnonprofits.org.)




Posted 10/11/01 -- PB