Keys2

A thoughtful commitment to charitable giving and sufficient funding are baselines for starting a nonprofit private foundation.  But there’s more needed.  Check out the following steps you should take as you move forward:

  1. Identify your reasons for starting a new organization.  Are they primarily altruistic or personal? What is it about starting and operating a private foundation that is compelling to you?
  2. Educate yourself on the requirements of what is generally involved in organizing and operating a 501(c)(3) private foundation.  Are you aware of the benefits and drawbacks of choosing one form for the private foundation over another such as a nonprofit corporation or trust?  Do you know who will govern and/or manage the private foundation and what are their duties, potential exposures to liability, and options for risk management?  Do you understand the applicable restrictions, including those against private inurement, self-dealing, and private benefit?  Do you have a sense of the costs that may be involved to effectively manage the foundation, pursue its charitable objectives, and ensure legal and reporting compliance?
  3. Determine whether the organization will be a grantmaking foundation, a private operating foundation, or a public charity (which would be subject to some very different, typically less restrictive rules).
  4. Identify the goals of the private foundation and assess whether your funding is sufficient to meet these goals.  Beneath a certain level of funding, many experts believe that a private foundation is an inefficient vehicle for furthering charitable purposes.  There is wide variation in identifying a specific minimum level of funding.  It is common to hear gift planning attorneys state $1 million ($50,000 minimum annual distribution) as a rule of thumb, but it really depends on the facts and circumstances of each particular organization.
  5. Refine the private foundation’s goals  to ensure that they are consistent with the 501(c)(3) requirements.  For example, grantmaking to individuals or taxable entities may or may not be permissible.  If such activities are being considered, know in advance the associated requirements and limitations.
  6. Based on the information gathered in steps 1 – 5, assess whether your motivations for starting a new organization and the goals of the contemplated private foundation are best addressed by (i) starting a private foundation organization, (ii) contributing to one or more charities in another organized manner (e.g., donor advised fund, giving circle), (iii) arranging for an alternative charitable gift planning vehicle (e.g., charitable remainder trust), or (iv) working with one or more existing organizations.
  7. Draft a business plan.  All of the work in the previous steps should be incorporated into this draft (which should be a live document, changing as facts and circumstances change), and it should also detail, among other things, a thoughtful SWOT analysis, marketing plan, and a 3-year budget (which you’ll need to submit to the IRS with your application for tax-exempt status).
  8. Draft the governing documents (e.g., articles of incorporation, bylaws, conflict of interest policy) with care.  Using another organization’s bylaws as a template may provide some guidance but is more often a mistake unless reviewed by an attorney.
  9. Check to see whether you must register to engage in charitable solicitations.  This is a commonly overlooked requirement.
  10. Draft the exemption application(s) with care.  Your completed Form 1023 will be a public document signed under penalty of perjury, and it may be scrutinized by the IRS more than a typical application for public charity status.  Also, remember to check on any state tax exemption requirements.

Learn more about starting a nonprofit and how we can help here.

– Gene Takagi & Emily Chan

This is Part Four of our five-part series this month on starting a nonprofit.

Part One – 10 Keys to Starting a Nonprofit – Public Charity
Part Two – Starting a Self-Sustainable Nonprofit
Part Three – Incubating a Nonprofit Social Enterprise
Part Five – Nonprofit Startups and the Value of a Nonprofit Attorney

54 Responses to “10 Keys to Starting a Nonprofit – Private Foundation”

  1. Priscilla Bushu

    I have just bought a peace of land in Africa my plans are to start a charity foundation to give back to the community. I am interested in working with ophans , widows give them the support system they need. I am not rich but l know this is my calling. Please help me with the knowledge on starting this project. I want to mainly start with donating books, soccer uniforms and kits, clothes, seeds, fertiliser, computers may be eventually help fund school fees for the under privilleged.

    • Gene Takagi

      American charities may not be able to operate in foreign countries without receiving proper authorizations from such countries so you’ll want to work with lawyers in both the country in which the land is located and in the U.S. if the land is to be used for charitable purposes. If you’re seeking to raise funds and goods to send to orphans and widows in Africa, you may want to look for an organization already doing this work and supplement its efforts. Collaborations can be the most effective and efficient ways to help.

  2. Melvin Torres

    I would like to start some type of foundation to give away tickets to baseball for kids that are less fortunate and their parents can’t afford to take them. My vision is to be able to give away two tickets to the parent can’t take the kid and make their dream come true . Idk what type of foundation or non profit does this falls on but would like to hear someone who knows about this on how to go about it. Any feedback will be appreciated . Thanks

    • Gene Takagi

      Take a look at some existing charities that do similar work and offer to fundraise for such a program. The key will be your ability to raise funds for the program, how effectively and efficiently the program will use the funds, and how it will select which kids and families to send.

  3. Connie

    What do I need to do to get contributions from myself, public by fundraisers ect. My daughter’s dog just passed only to be denied access for more testing that she could not afford. She tried financing and was denied. I want to start a fundraiser so other pet owners like ourselves if funds are an issue for the welfare of their pet it could be available.

    • Gene Takagi

      It may be best to find an animal welfare organization willing to run the program. The organization may be agreeable to having you fundraise for the program. But one usually can’t fundraise for a charity if she or he expects the charity to give the funds back for their own use.

  4. Jeanna w

    hi I’m trying to start a non-profit to help save animals that get hit by cars where we go to schools and camps and teach a lesson about how to prevent this and we also want to set up a website or something like that where people can donate money to help us to do that how do I do that

    • Gene Takagi

      Make sure you have all the resources you need to responsibly start and run a nonprofit and that starting a nonprofit will be more effective at saving animals than supporting an existing nonprofit. Very often, it’s better to work with an existing nonprofit. If you and your friends are still minors, starting a nonprofit may not be possible without your parents or guardians accepting all of the legal responsibilities. But you can get a head start by reading books on starting and running a nonprofit to set something up later. Good luck!

  5. Elizabeth Charlton

    Am looking to start a Friends of group
    For a City Cemetery to raise awareness and conduct fundraising for restoration & repairs to a National Register Landmark Cemetery Property.
    Any suggestions?

    • Gene Takagi

      Assess whether you have enough resources committed (beyond the startup phase) to create a viable nonprofit or fiscally sponsored project before you get started.

  6. Chuntell

    My current employer would like to start a nonprofit or private foundation to help provide funds to those who need help with making rent or mortgage payments. It is a private family owned real estate firm and is successful for over the last 15 years. I am a current realtor and board member for two community organizations. I am also a graduate student in my last semester as a public administration so they thought it would be good for me to take on this project .. I have background but not in a start up. How do I start ?

    • Gene Takagi

      Mortgage assistance organizations generally raise complicated private benefit issues, and I believe most do not qualify as 501(c)(3) organizations. Rent-assistance to benefit a charitable class of distressed individuals may be consistent with 501(c)(3), but it will depend on the particular setup. This is a project that requires a lawyer with exempt organizations experience and ultimately the project may not qualify as a 501(c)(3).

  7. Nia Lawrence

    I want to start a foundation in honor of my daughter, for children with special needs. I want to include the Caribbean whenever am donating. I want to start private and then gradually accepting gifts from others

    • Gene Takagi

      This post describes some of the legal steps to starting a nonprofit exempt under 501(c)(3) and described as a private foundation. But it doesn’t cover in significant detail all of the business and operational considerations. Persons who are interested in starting a private foundation generally look to fund it with significant funds and make grants to other organizations. Making grants in a compliant and thoughtful manner can require significant administrative and legal costs, particularly at the start and especially when grantmaking to foreign entities.

      Make sure you know the difference between a private foundation and a public charity (not the subject of this post) and which you are interested in forming. And consider whether you have sufficient resources to start and operate a viable nonprofit. This may include some seed funding but also persons who will be effective board members and officers and access to future funding. Consider whether starting a new nonprofit is the most efficient way to help children with special needs rather than supporting and/or working with existing nonprofits who work in this area. Focus on the mission, learn as much as you can, research the market, and collaborate with others. Good luck!

  8. Angel

    I am a massage therapist that provides a large amount of probono work for special needs children and adults suffering from paralysis and other mobility issues. I am in high demand for my services as I am one of the only providers in my area of this specialty. Unfortunately, I camnot fill the need as I do need to also work for compensation. There are multpile grants available to cover my costs at a reduced rate but only a 501c3 can apply. I have non-profit experience in traditional public charity, but am concerened about conflict of interest as I would need to be reimbursed for the massage services. I would not be compensated for the administrative and operational duties. Would a private operating foundation be a better choice? I do not plan on limiting the work I do to only the massage I provide. I would like to find funding to cover massage from other providers without the patient having to be responsible for payment.

    • Gene Takagi

      It sounds like you’re doing some great pro bono work. Generally, unless a potential founder of a private foundation has ample resources (human, financial, etc.) to make it a viable ongoing operation able to advance its charitable mission effectively and efficiently, I wouldn’t recommend forming one. If the founder wanted to be a board member and a compensated individual, there are conflict of interest and self-dealing issues involved, and may not be permitted under the private foundation rules. In such cases, fiscal sponsorship may be something worth looking into, but even there, you’ll need to have certain funding commitments to earn the confidence of a good fiscal sponsor.

  9. Erica

    Hi, me and my husband was giving some property and we want to obtain funding to build housing and transportation for the elderly. The property was given to us by our grandparents who also are Pastor and First Lady of our church. We already have the nonprofit status 501c3 but how can we go about getting funding to build the facility?

    • Gene Takagi

      Getting funding is a challenge for most nonprofits. We’re lawyers so can’t help you with that. You may want to check with some nonprofit fundraising consultants. The Association of Fundraising Professionals may be able to provide you with a referral.

  10. Dean

    Would like to start a non profit foundation for our kids. We understand that if we do the 501 c 3, in order to get tax exempt donations, we have to involve others. But what if the funds come from sales of their products and books and we want to maintain our own vision?

    • Gene Takagi

      You’ll want to confer with an attorney or knowledgeable consultant. I can’t tell if you want to form a private foundation (what this post is about) as opposed to a public charity and who represents the charitable class to benefit from it (“our kids”?). A sale of goods may or may not be considered consistent with furthering a charitable purpose. If it’s inconsistent (e.g., selling the top 10 best selling books), such activity could possible disqualify the organization from obtaining recognition of 501(c)(3) status (if the activity was a substantial activity) or subject the organization to unrelated business income tax. As you might imagine, there can be a lot of gray area between sales that further the organization’s charitable purpose and sales that do not.

      • Dean

        Thank you. How could we talk to you about potentially counseling and representing us?

        • Gene Takagi

          Dean, if you’re thinking of forming a nonprofit in California or New York, we may be able to help. You can contact us at info@neolawgroup.com. If you’re thinking of forming it in a different state, I suggest you contact a local or state bar association and ask for an exempt organizations attorney or a tax attorney experienced at working with nonprofits.

  11. Libby

    A group of us have been meeting at a local church knitting and crochet for those who are out in the cold.
    We are making hats, scarfs, mittens and even took in a few already made products that were donated to hang on trees, park benches, lampposts etc.

    Could we turn this into a non-profit?

    • Gene Takagi

      A private foundation wouldn’t normally be the right form for a church group making products to donate to those who could use such products. A public charity might be a form that works, but unless you have sufficient resources (human, financial, etc.) and there will be greater impact created by a new nonprofit than working with an existing one, I would generally recommend against starting a new nonprofit. Over 600,000 nonprofits lost their tax-exemptions over the past few years because they weren’t able to comply with certain filing requirements and most were likely abandoned.

  12. Noella Kimbi

    Thank you for this opportunity. I’m 22yrs old and I’m interested in starting up a foundation for addicts of all sorts, the underprivileged, teenage mamas and downcast. I’m just excited about the idea and especially when I think of the outcome and the nation of like minded successful people I’ll be inspiring. I’m reading up a few articles on setting up such an organization. I really want to see this push
    through

    • Gene Takagi

      Noella, it’s great you want to do something good for others. But consider whether your priority is starting a new nonprofit or helping people and how those two things aren’t always correlated. Also, make sure you know the difference between a private foundation (the subject of this post) and a public charity.

  13. Sherric

    Hi there, my girlfriends and I here in NYC have formed an informal group and had a bake, sale raising over $800, which we then used some of the funds to purchased Christmas presents for kids at a shelter. We would like to register the group as a non profit to continue raising funds through similar avenues and donations, to provide assistant to our former high school (in the Caribbean) and to continue to help the less fortunate here in our community.
    We also signed up and volunteer with a number of non profit group in our city.

    how do we go about doing this, all the information is mind-boggling.

    • Gene Takagi

      First, I’d like to emphasize that it sounds like you’re doing great work! Second, it seems that you intend to start a giving circle. Consider working with an existing nonprofit that provides funds to the Caribbean and would be amenable to supporting your former high school. Starting a nonprofit is in many ways similar to starting a business and requires navigating all the challenging requirements and diligently considering whether you have the resources to make it effective, efficient, and sustainable. While there are always exceptions, I tend to believe that most startups that cannot consistently raise at least $25,000-$50,000 in its first few years will not have long-term viability and would have been better operated within an existing nonprofit. Keep the emphasis on helping the community and finding the best way to do it. Good luck!

  14. Erika Tolbert

    Hello, I am 23 years of age and I will like to create a non profit foundation. I will like the purpose of my foundation to inspire and motivate people to believe they can accomplish anything they set their minds to. I would like to be a volunteer group whose goal is to help others in need such as single mothers, the homeless, juvenile children, foster care children etc, but the question is I have this huge vision but where do I begin to create my foundation???

    • Gene Takagi

      It would be best to prepare in advance. Read some books, talk with some people who have started similar organizations, get supporters and initial donors ready, create and refine a solid business plan, consider alternatives (e.g., fiscal sponsorship, working with an existing organization), then make the decision on how to proceed. Make sure your decisions are focused on the mission and people you wish to serve rather than on leading an organization yourself.

  15. Cilla Ciku

    I am work for a small charitable foundation registered in Kenya and I want to solicit support in US in cash and kind. Do we have to register the foundation in US to be able to fundraise from there? Which are some of the organisations I hear our foundation can join and fundraise through them in US rather than registere our foundation there just for fundraising purpose?

    • Gene Takagi

      A foreign charitable organization would be required to register in any states within the U.S. requiring registration (most do). However, a foreign organization (even a properly registered one) generally cannot receive deductible contributions from American taxpayers. For some foreign organization, forming a “friends of” organization in the U.S. that receives recognition of 501(c)(3) status is the way to successfully fundraise in the U.S.

  16. Bill Lewis

    I would like to start a non profit the seeks and donations of used instruments to give to youth that want to take music courses in secondary school. These gifts would go dirextly to the individuals for their life long use. I know schools somethings have instruments but I would like to give directly to individuals. It is empowering to own your own instrument and have ability to play for the rest of your life.
    I would like to be able to take donations to purchase instruments and repair gifted instruments. What type of organization would I need to create?

    • Gene Takagi

      If the scope of the activity isn’t very big (e.g., your plan is to donate less than 100 instruments per year), you might think about working with an existing nonprofit or simply making gifts to individuals for which you will not receive a charitable contribution deduction. If the scope of the activity is big, and you have others who share our passion and want to serve on the board of an organization that carries out such activity, talk with a lawyer in your state who understands how to structure an appropriate program that complies with 501(c)(3) rules.

  17. John solomon

    I have my heart set on starting up a non profit organization for kids without insurance and can’t pay medical bills. Each month I would like to be able to pay off a child’s hospital bill for what beer purpose he/she was in for. I know so many kids who don’t have insurance that need surgery although the surgery will be done I would love to help families in my state pay for there surgeries or medicine. How do I go about it?

    • Gene Takagi

      First and foremost, helping kids without insurance is a wonderful goal. But consider whether your heart should be set on starting and running a nonprofit or focused on benefiting those kids through an existing nonprofit or even as direct gifts (but foregoing the charitable contribution deduction). You can set up a nonprofit private foundation, but there may be significant costs, administrative burdens, and responsibilities associated with organizing and operating the foundation. That may be fine if you have enough resources (human, financial, etc.). If the resources you want to contribute are more modest, then working with another nonprofit may be a way to make your contributions most effective at advancing your charitable goal. Good luck!

  18. Faith Chelagat

    I work in one of the slum areas in kenya. And their poverty levels has moved me. i want to start a poverty eradication and mentorship program which aims at reducing poverty level, crimes, drug abuse and prostitution. I need some advise on how to go about it.

    • Gene Takagi

      Collaborating with existing organizations may be the best route. If you can find the funding and have a strong background in leading such work, an existing organization may be willing to operate the new program and delegate its management to you.

  19. Tami

    I am a massage therapist that would like to buy a spa and make it a non profit business and donate the money to other established charities. There are three charities I have in mind already. So is a private foundation something that would be better to start?

    • Gene Takagi

      I hope you review some of the other comments related to the decision of starting a private foundation. I’m adapting one of these previous comments to respond to your question:

      The decision to start a private foundation is a big one, and many professionals believe a person should not start a private foundation without being prepared to contribute a major sum of her or his own money. Are you thinking instead of starting a public charity? Note that either a private foundation or public charity can have grantmaking as its principal charitable activity.

      Massage therapy can be part of an organization’s charitable activities but if it is run like a commercial (i.e., for-profit) massage therapy practice, it may result in unrelated business taxable income or even disqualify the organization from being able to obtain/keep 501(c)(3) status based on failure of the operational test (if the massage therapy is a substantial part of the organization’s activities). You might review our blog for some descriptions of the commerciality doctrine and why that may be an issue here.

      I would also advise doing some research and investing in a book or two on starting a nonprofit before moving forward unless you have a strong knowledge of nonprofit startups and at least a few people who are going to serve as the initial board members. The most important steps in starting a private foundation: (1) have a viable business plan that includes how the foundation will be funded and why starting a foundation is preferable from a public benefit standpoint over working with existing charitable organizations; (2) recruit board members who will actively meet their fiduciary duties and contribute to the success of the foundation at furthering its mission.

  20. Michael Drew

    Hi… We are a group of retired military guys that what to start a non profit group to be able sponsor underprivileged children in sports, sponsor teams; providing team jerseys and any if needed equipment to areas around the country that need items and support to create more accessibility for children to play. We want to be able to receive charitable funds and other tax deductible monies and give out where needed. Can you tell me what type of non profit would best fit our mission? Thanks You very much for your time.

    • Gene Takagi

      It would appear that the stated activities fit within the requirements under 501(c)(3), but it’s where the organization derives its funding from that may determine whether it will be characterized as a private foundation or public charity. You may want to confer with a nonprofit organizations lawyer in your state regarding the possible structures (e.g., nonprofit corporation, unincorporated nonprofit association; state of incorporation or formation) and whether any of your contemplated activities might be problematic.

  21. Victorina Amunime

    Hello…… I’m a 21 year old student….. i have been battling depression, social anxiety, an assault from when i was younger….early this year (2015) i got help and i’m now able to live my life normally like i have always wanted. My friends encouraged me to start up a foundation that will not only educate people but also be an out reach to those who are battling the same of even worse conditions…..what are the most important steps in starting a nonprofitable foundation?

    • Gene Takagi

      I’m sorry to hear of your battles. The decision to start a private foundation is a big one, and many professionals believe a person should not start a private foundation without being prepared to contribute a major sum of her or his own money. Are you thinking instead of starting a public charity? I would advise doing some research and investing in a book or two on starting a nonprofit before moving forward unless you have the base knowledge and at least a few people who are going to serve as the initial board members. The most important steps in starting a private foundation: (1) have a viable business plan that includes how the foundation will be funded and why starting a foundation is preferable from a public benefit standpoint over working with existing charitable organizations; (2) recruit board members who will actively meet their fiduciary duties and contribute to the success of the foundation at furthering its mission.

  22. Susan Ward

    Hello, I am interested in possibly starting a foundation for the disease Pure Autonomic Failure. It is very rare. I have it. I live in CA and my doctor is in AZ at the Mayo Clinic. Difficult going back and forth. The next closest doctors are at the Mayo in Minnesota & Florida and the Cleveland Clinic. The medicine, Northera, which just came out last year to help with symptoms, is 2550.00 per month. That price is after insurance has paid. I think a foundation would be helpful not only to the patient but educating family, friends and the public.

    • Gene Takagi

      Susan, feel free to contact us directly if you’re interested in starting a foundation. For many startups, the first issue is whether it will be adequately capitalized. Some professionals believe in a minimum of $1 million to $2 million in initial funding to create a private foundation that can be operated effectively and efficiently. But that may assume creation of a foundation that is endowed and expected to exist perpetually. Some foundations get funded more modestly at the start but with the expectation of future funding to advance the plans of the founders and funders. Other foundations also funded more modestly at the outset plan to spend out and dissolve in a relatively short time-frame (e.g., 10 years). Is your plan to create and fund the foundation for the benefit of others with Pure Autonomic Failure?

  23. Kim miller

    I want to establish a foundation in honor of my husband who battled a heart disease for ten years.

    • Gene Takagi

      Kim, I’m sorry for your loss. Feel free to contact us directly if you’re interested in establishing a private foundation. Please be aware of the various considerations you should take into account before moving forward, including adequate funding, governance, management, administrative requirements, grantee selection, grant due diligence, effectiveness and efficiency determinations related to the grantmaking, and possible alternatives to a private foundation.

  24. Beverly Williams

    I am interested in starting a foundation in honor of my niece who transitioned on September 8 2015 from breast cancer. Since then I have participated in several events for breast cancer awareness. I feel that for me involvement with organizations that are doing things in this srea for the community and for families and survivors will give me a better understanding of this process. It will also allow me to be a advocate for this disease in helping to find a cure and bringing awareness to so many families in the process. If later I decide to move forward with my desire to establish a foundation in honor of my niece, I will be equipped with the tools needed to operate it with integrity.

    • Gene Takagi

      Beverly, it may also be worth asking yourself why it’s better for the community and for advancing the charitable purpose for you to start a foundation versus supporting and volunteering for one or more existing organizations that are engaged in the same work. “If You Want To Go Fast, Go Alone. If You Want To Go Far, Go Together”

  25. Darlene lucero

    I’m looking into nonprofit to find families that need help with gifts for their children during Christmas time to be Santa for them. I have had people say they would donate but asking if it could be taxable. Also businesses often want a name of organization before they donate. We only want to do this during the Christmas season but want to ask for donates all year, so we can help more families the following year.

  26. Lashonta Andrews

    MY PASSION ARE FOR LITTLE KIDS AND ELDERLY WHOM CAN’T DO FOR THERE SELF. MY HEART IS SO HEAVY FOR IT I JUST DONT KNOW AND HOW TO START THIS PROJECT PASSION I DESIRE TO DO

Comments are closed.