How to Set Up a Private Foundation
If you’ve decided that you would like a private foundation of your own, we can establish it for you or assist your attorney with our specialized expertise. Here’s how the process works:
Initial Planning
Donors often wonder what they need to know and do before they establish a private foundation. Here are some of the questions many of our clients ask as they begin the process:
How do I choose my board?
One of the great things about having a private foundation is that you alone get to choose its board structure and decide who initially sits on it. Who you choose to sit on your board depends on what type of foundation you want. Will it be a family entity or are you going to pursue a specific mission or fund a particular community? You will want to bring on people with expertise related to your objectives.
Some states, such as Delaware, allow you to serve as the foundation’s sole director, you may also appoint a spouse, children, other family members, business associates or whomever like as officers and directors. To help increase involvement by family and friends without appointing them to the foundation, Foundation Source has created a unique giving tool called “Grant Certificates.” These enable the foundation to give limited granting rights to those not officially on the foundation.
Do I need a Mission Statement?
A frequent question we hear from Foundation Source clients when they first establish their foundation is whether they should create a mission statement. Our answer: yes, but not necessarily right away. The IRS requires that private foundations have a statement specifying the organization’s charitable intent in its incorporating documents. To fulfill this mandate, many foundations adopt the broad statutory language that defines all nonprofits (e.g., “for religious, scientific, literary, educational or other charitable purposes.”) Beyond this, there is no legal requirement to create a mission statement.
What if I don’t have any idea what issues I want to work on or where to give?
Then you’re in good company! Many of our clients don’t start out with a clear philanthropic objective, so we recommend an evolutionary approach to determine your foundation’s purpose. Begin by making grants to a wide variety of causes to find out what really motivates and excites you. What issues hold your interest? Where are you achieving the most impact? We have witnessed countless clients declare or change their philanthropic course as a result of a life-changing travel experience, a chance encounter, a compelling newspaper article or an unexpected life event. Something occurred that sparked their philanthropic zeal: the threatened demolition of a beloved local landmark, the untimely death of a loved one, a flash of insight about how they might leave a better world for their grandchildren. At this point, these donors were ready to commit fully to a particular cause.
What’s the minimum size for a foundation?
The old wealth advisors’ rule of thumb advised that a private foundation did not make sense unless the initial funding was $5 million. This was due to the complicated nature of setting them up and the ongoing expenses to keep them running. Foundation Source has revolutionized the private foundation by developing technology and efficient processes that dramatically streamline the delivery and ongoing administration of private foundations. Foundation Source makes it possible to establish a new foundation with less than $1 million in initial funding.
How much of my personal time do I need to devote to a foundation?
In short, you can devote as much or as little time as you’d like. Although some of our clients have chosen to make philanthropy their second careers, Foundation Source was established to minimize the work associated with running a foundation. We file taxes, monitor compliance, handle back-office responsibilities, and provide philanthropic experts who can help you achieve any goal you choose. All you have to do is enjoy your giving.
Will I need to hire staff?
Not unless you want to. Foundation Source becomes your “virtual staff,” so there’s no need to pay employees to run your foundation. However, private foundations are permitted to pay reasonable compensation to foundation “insiders” (including trustees, directors, officers, donors, and foundation managers as well as their immediate relatives) for professional services to the foundation—even if they’re family members. If you’re interested in paying people for their work on the foundation, Foundation Source offers a compensation benchmarking service to help ensure your foundation adheres to IRS regulations.
Should my foundation last forever or cease operations after my lifespan?
There are good arguments for both limited lifespan and perpetual foundations. The only right answer is the one that’s right for your foundation. The IRS does not provide guidance on this issue nor is there consensus in the field on best practices. As such, we recommend that donors and families address the issue of the foundation’s lifetime early on in the foundation’s existence. Because lack of clarity about how long the foundation will continue can negatively affect the next generation’s level of engagement, we recommend that donors carefully consider the following questions:
- Does your foundation’s philanthropic objectives lend themselves to shorter- or longer-term funding?
- How much latitude should there be for future generations to identify and support their own priorities?
- Is there a plan for succession? Is there enough interest in the family to carry on?
- How important is it to have the foundation/family name continue to exist through philanthropic activities?
Whether you choose to keep your foundation going for generations or not, our philanthropic experts have seen how addressing the “lifespan” question leads to a foundation that is better focused on the work of today and well prepared for the future.
Trust or Corporation?
The first step in establishing a private foundation is to form the organization as either a trust or corporation under state law. Although a trust has fewer requirements for paperwork, record keeping, and filings, it’s also a more rigid organizational structure and can typically only be altered by court order. A corporation is a much more elastic structure and provides more legal protections for its officers. , Foundation Source typically sets up private foundations as corporations.
Incorporation
Regardless of your own state of residency, there are many unique benefits to setting up a foundation as a Delaware corporation. First, foundations set up as corporations have much greater flexibility than those set up as trusts. Second, Delaware allows for sole-director corporations. This means the founder may be the sole individual involved on the foundation, if he or she chooses. Third, Delaware allows annual meetings to be held electronically via telephone or Internet, which greatly simplifies this requirement—especially when family members live far apart. Foundation Source also works with foundations set up by your attorney as well as existing foundations regardless of state of incorporation or organizational form.
Private foundations established by Foundation Source are incorporated in Delaware because it is a very friendly state for corporations, whether they’re for-profit or not-for-profit:
- Delaware has well-defined statutory provisions in place with respect to the indemnification of officers and directors.
- Delaware’s corporate law also explicitly provides that a corporation may maintain its minutes in an electronic format.
- The Delaware Chancery Court has developed an unparalleled body of case law that is frequently cited as precedent in other state courts.
- Corporate filings in Delaware can be completed quickly and at less expense than in other states.
While many other states impose cumbersome filing requirements on exempt organizations, in Delaware, the requirements are light: A private foundation need only file a copy of its annual tax return with the attorney general and pay a small annual franchise tax to the Secretary of State with a basic corporate report each year.
IRS Recognition for Tax Exemption
Once the foundation has been incorporated, it must apply to the IRS for recognition as a tax-exempt charity. This recognition enables the foundation to call itself a 501(c)(3) charity and to receive tax-deductible contributions from its donors. (As explained in What is a Private Foundation, private foundations typically derive all of their financial support from a single individual, family, or corporation. Although not prohibited from doing so, private foundations do not typically engage in fundraising.) It also exempts the foundation from having to pay federal tax on its income.
To obtain this exemption, the foundation must file IRS Form 1023, “Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code.” Filing Form 1023 is usually a private foundation’s first introduction to the Internal Revenue Service. This form is also significant for a fledgling tax-exempt organization because it will be subject to IRS scrutiny and, once completed and submitted, the foundation’s Form 1023 will be available as a matter of public record. Because Form 1023 is so important, it is imperative that it be completed accurately and carefully—a task that even seasoned advisors choose to leave to private foundation specialists, such as the professionals of Foundation Source who have filed more than 1,000 successful 1023 applications.
Why Foundation Source should set up your foundation?
Why should you choose Foundation Source to create and administer your private foundation? There are dozens of reasons, but we’ll give you three:
- Experience: For nearly three decades, Foundation Source has been dedicated to creating and managing private foundations. We have established more than 1,000 private foundations, with a 100% success rate in gaining exempt status. No other company or professional firm has a comparable track record.
- Speed: We have experienced staff and a proven process for creating private foundations quickly. How quickly? Your new foundation can be up and running, ready to make grants, in as little as three business days.
- Cost: While cost is only one piece of the equation, it is an important one. Our set-up fees are significantly less than those others typically charge because our streamlined process saves time, enabling us to pass the savings along to you.
Establishing the Foundation: What Does Foundation Source Do?
When you engage Foundation Source to create your private foundation, we take care of the entire process. Our foundation creation services include:
- Creation of a Delaware non-stock corporation
- Certificate of Good Standing from the state of Delaware
- Bylaws and essential governance policies/guidelines for a private foundation
- Services of a registered agent in Delaware for the corporate entity
- Completed Application for Employer Identification Number (Form SS-4)
- Completed Tax Information Authorization (Form 8821)
- Completed Application for Recognition of Exemption (Form 1023)
- Filing of all signed forms returned to us
- Tracking of Form 1023 while pending with the IRS
- Handling of any routine inquiries from the IRS regarding Form 1023
After your foundation is set up, we provide comprehensive services to keep it running smoothly. We take care of all the back-office tasks, including grant and expense processing, tax preparation and filing, transaction monitoring for potential compliance issues, and financial and regulatory reporting.
Learn more about Managing Your Foundation
Establishing the Foundation: What Do I Need to Do?
While we handle the paperwork and filings, your role is as easy as 1-2-3! Here’s all you need to do:
- Choose a name for your private foundation. You can name your private foundation after your family, the charitable purpose, or something generic that inspires you or enables you to maintain a low profile.
- Complete the brief set-up questionnaire. This tells us who will fund the foundation and where the foundation’s investment account will reside.
- Fund your foundation and start giving. You can start your foundation with a relatively modest sum and add to it over time.
Next Step
Ready to learn more about creating a private foundation? Have questions about our services? Contact us!
