How to Start a Foundation for Your Nonprofit Organization

How to Start a Foundation for Your Nonprofit Organization

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:

1. Understand nonprofit foundation basics
2. Determine the legal structure
3. Fill your foundation’s board
4. Establish a fundraising plan
5. Budget your foundation’s money separately

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.

1. Understand nonprofit foundation basics

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:

1. Funding: A foundation is generally sustained through private monetary donations, securities, and other funds, not donations from the public, though that is allowed.
2. Activities: While public charities provide some kind of charitable good or service to the people they assist, a private foundation exists primarily to grant funds. Although their grants usually support charitable activities, foundations don’t usually participate directly in the programs or services.
3. Taxes: Private foundations are exempt from income tax, just like other nonprofits. However, they are subject to a 1-2% excise tax on income generated by investments.

With the unique role of a foundation also comes 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. Understanding how foundations work will give you the necessary context to begin planning the structure and operations of your foundation.

2. Determine the legal structure

The logistics of organizing and operating a private foundation require legal supervision. To avoid legal obstacles when starting a foundation, you’ll need to:

• Double-check your proposed name. Do a quick search to make sure that the name you’ve picked out for your foundation is not registered with another corporation.
• Fill out the Articles of Incorporation. These are essentially the legal documents that make your foundation legitimate—like a business plan, but for nonprofits. You can find plenty of templates online if you’re doing this without an attorney.
• Create bylaws for your foundation. These rules will outline how you plan to select your board, avoid conflicts of interest, manage your funds, etc. Some states don’t require bylaws, but it’s always smart to have them anyway for contractual and organizational purposes.

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. 

You should be 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. 

3. Fill your foundation’s board

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:

• Accountability: Board members will ensure the foundation’s operations advance its mission.
• Advocacy: Board members will be ambassadors for the foundation, representing your organization and its work in their social circles.
• Governance: Board members will steward assets in the best interest of the foundation and address any conflicts of interest as they arise.
• Networking: Board members will make connections with other community leaders.

As you select board members, keep these tasks in mind and consider who would fill these roles most effectively. 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, while 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.

4. Establish a fundraising plan

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:

• Crowdfunding campaigns
• Events, like galas or auctions
• Handwritten donation appeals

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.

5. Budget your foundation’s money separately

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 it’s important that you keep it entirely separate from your nonprofit’s budget. For example, your foundation will need to:

• Create two types of grants—general support and specific project grants.
• Keep a record of all grants given throughout the year.
• File annual tax returns, such as Form 990-PF.

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.