If you want to improve your community or meet a social need that no other local organization is pursuing, you might consider starting a nonprofit foundation. But make sure your foundation meets the requirements set forth by the IRS first. Rather than operating for profit, your organization's purpose should be for a social good.
A nonprofit private foundation is a default categorization given by the IRS to all charitable organizations that have 501(c)(3) nonprofit status but don't qualify to be public charities. These private foundations work for the public good, often by helping educational, religious or community activities, and they frequently give grants to other nonprofits. Nonprofit foundations get most of their contributions from a few sources, including investment earnings, while public charities tend to get their contributions from grants, the government and other nonprofits. It is easiest to define a nonprofit foundation by what it is not: a private foundation is a nonprofit that is not a public charity, and charities include churches, medical research organizations, hospitals, schools and universities. For example, a nonprofit foundation could be an organization focused on helping educate people with learning disabilities but is not itself a school.
When you want to start a nonprofit foundation, make sure that you file all the paperwork required by your state in order to operate as one. The exact forms needed will vary from state to state, and you can check with your secretary of state's office to find out specifically which forms you'll need. You can likely download these forms from your secretary of state's website and third-party legal websites. Typically, you will need to register your foundation's name as well as file your foundation's Articles of Incorporation with your state.
Federal Tax Filing
A key benefit of registering as a nonprofit is acquiring federal tax-exempt status. You'll need to fill out quite a bit of paperwork to achieve this. Publication 4220, available on the IRS website, gives details on how to apply for 501(c)(3) tax exempt status. This will free your foundation from being taxed on its income. To qualify, your foundation must operate solely for 501(c)(3) purposes, its earnings can't benefit one individual and a substantial part of its activities can't be focused on campaigning or influencing legislation. Qualifying 501(c)(3) purposes include charitable, scientific, literary, public safety, amateur sports, and preventing cruelty to children and animals. You will need to file Form SS-4 to get an employer identification number and Form 1023 to specifically apply for exemption. When the IRS awards you tax exempt status, it will send you a tax determination letter.
State Tax Exemption
You will also want to get tax exempt status from your state, but you won't qualify for this until after your foundation receives tax-exempt recognition from the IRS. The specific rules will vary by state, but you will likely need to register as a charitable organization with the secretary of state's office. In Maryland, this involves filling out an Exempt Organization Fund-Raising Notice. In Arizona, you have to file an exempt notice as well as an annual report with the secretary of state before receiving any charitable donations, and then you have to file again every September. Some states require an additional registration with the state's Department of Revenue in order to be exempt from state taxes.
- Arizona State University: How Do I Start A Nonprofit?
- IRS: Life Cycle of a Public Charity/Private Foundation
- IRS: Private Foundations
- USDA: How to Start a Nonprofit 501(c)(3) Organization
- National Council of Nonprofits: How to Start a Nonprofit | Step 3: State Forms
- Richmond School of Law: Chapter 2: Forming the Organization
- Maryland Secretary of State: Non-Profit Organization
- IRS: Exemption Requirements: 501(c)(3) Organizations
- IRS: Exempt Purposes - Internal Revenue Code Section 501(c)(3)
- Grant Space: What is the Difference Between a Private Foundation and a Public Charity?
- Minnesota Council on Foundations: Private Foundations vs. Public Charities
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