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:
- 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?
- 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?
- 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).
- 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.
- 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.
- 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.
- 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).
- 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.
- Check to see whether you must register to engage in charitable solicitations. This is a commonly overlooked requirement.
- 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