Nonprofits operate in a continuous cycle involving donor acquisition, fundraising efforts, and mission-driven work. As a nonprofit leader, you may be looking for new ways to give to your community and break out of your organization’s cyclical operations.
By forming a private foundation, you can continue your nonprofit’s work while supporting other organizations that address a cause you care about. In this guide, we’ll cover the five necessary steps to start a foundation:
With the right funding and approach, you can create a foundation that takes your community service a step further. We’ll give you all the tools you need to start a foundation and, more importantly, maintain it.
Before you get started, you should be able to answer one question: What is a nonprofit foundation?
Organizations that qualify as 501(c)(3) tax-exempt are automatically defined as private foundations by the IRS unless they satisfy certain exceptions, such as being organized as a church, hospital, school, or other specifically named entity type. These private, nongovernmental organizations are usually organized by a single source—like a family or corporation—which then distributes grants to help fund other nonprofits, most often public charities.
There are three key differences between a public charity and a private foundation:
The unique role of a foundation also comes with different legal requirements. For example, foundations must give 5% of their net assets in grants each year for charitable purposes. These are most often grants to public charities, but other charitable recipients can be included. They are understanding how foundations work will give you the necessary context to begin planning the structure and operations of your foundation.
The logistics of organizing and operating a private foundation require legal supervision. To avoid legal obstacles when starting a foundation, you’ll need to:
There are numerous legal steps to follow, and you’ll need to contact your Secretary of State’s business office to make sure you don’t leave anything out. If you’re confident in your ability to navigate these legal requirements and want to save money, you can do this all yourself. However, hiring an attorney can help you avoid the risk of noncompliance penalties.
It would help if you were prepared to pay a few legal fees during this process and can plan for the investment in an attorney in your legal fee budget. Decide whether or not you want to hire an attorney, then complete the necessary paperwork and submit it to the IRS.
After receiving tax-exempt status from the IRS, start planning the structure and operations of your foundation. Much like you’d hire employees upon starting a business, you’ll need board members to manage and operate your foundation. Board members will be responsible for many tasks, including:
As you select board members, consider these tasks and consider who would most effectively fill them. As the leader of your foundation, you should also be a board member (or heavily involved with this team).
Your board should include a variety of close-knit and resourceful members. The team members with whom you have personal connections will help cultivate a strong sense of community. At the same time, outsiders can provide the connections that bring in bigger donations and networking opportunities.
To achieve this balance, some foundations turn to close friends, family members, experts within the field, and independently wealthy people who are passionate about their cause. Determine your foundation’s specific needs and choose your board accordingly.
Although foundations typically have a steady funding source or a principal investment, such as an endowment, you may also need to fundraise to keep your foundation afloat. As a nonprofit leader, you likely have a solid background in fundraising strategies. You can leverage these tried-and-true techniques, such as:
However, raising money for your private foundation isn’t as simple as just choosing a fundraising idea. To publicly solicit donations for your foundation, you may need to register for charitable solicitations in your state. Also, contributions to a private foundation will have different requirements than those to your nonprofit. Fundraising is another area of foundation management in which an attorney or budgeting expert will be helpful.
However you choose to fundraise, make sure you’re always budgeting and planning for the months ahead. You’ll have different fundraising goals, expenses, and tax requirements with your foundation, so you must keep it entirely separate from your nonprofit’s budget. For example, your foundation will need to:
Your private foundation and nonprofit are separate entities with different goals and requirements. To ensure both organizations maintain compliance with their different legal structures, you’ll need to keep their budgets completely independent from each other. Ask an attorney for help if you’re concerned they might be overlapping.
Once you know how to create and sustain a foundation for your nonprofit, you’ll be able to expand the impact of your work and give back to your community more than ever before.
Keep up with the requirements of private foundation operation, but don’t be afraid to enlist the help of an expert if you’re able to! Compliance is their job, and social good is yours. Focus on your mission and leverage the power of private foundations to accomplish your goals.