Rules & Regulations for Non Profit Foundations

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The United States has 75,187 private and public foundations. They provided $19.1 billion in grants in 2006 to charitable causes. Foundations are ruled mainly by federal Internal Revenue Service regulations, but some state laws apply.

Types of Foundations-Private

Bill Gates of the Bill & Melinda Gates Foundation, which is the one of the best-known foundations in the world.
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Foundations come in two basic types: private and public. Private foundations are the most common in the United States. Private foundation is a term in the IRS code used to describe any grant-making foundation that isn't supported by public money. A private foundation receives money from an individual, family, corporation or some combination of those entities. An example of a private foundation is the Bill & Melinda Gates Foundation (family foundation).

Types of Foundations--Public

Public foundations receive more than one-third of their funding from multiple donors, which can include individuals, private foundations and government. All public foundations must continue to seek funding from diverse sources in order to keep their status as a public charity. An example of a public foundation is The New York Community Trust (community foundation).

Tax-Exempt Status

It's always best to consult an experienced lawyer when considering considerng the establishment of a foundation.
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To be considered tax-exempt, that is, exempt from having to pay federal, state and local taxes, public and private foundations must be organized exclusively for purposes recognized as exempt by the IRS. To meet that requirement, grant makers must use their funding for charitable, educational, religious, scientific or literary purposes. Foundations obtain recognition of tax-exempt status by filing IRS Form 1023, "Application for Recognition of Exemption."

Regulation of Private Foundations

The regulations for private foundations are more stringent than for public foundations. Private foundations must distribute at least 5 percent of the annual average value of their assets to charitable causes. They must pay an excise tax on their net investment income. Private foundations also are restricted from "self-dealing," which are transactions between private foundations and what the IRS terms "disqualified persons," such as board members. This is to remove the potential for an individual to benefit from the foundation's largess. Private foundations also have limits on their business and investment holdings, and are limited in the amount of political advocacy they can fund. As well, some states have laws regarding private foundations. For example, some have laws limiting the composition of a board. A private foundation must also file an annual report with the IRS, called Form 990-PF. Many state charity offices also require an annual report.

Regulations of Public Foundations

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Unlike private foundations, public foundations do not have a required annual payout rate. But like other public charities, they are required to file Form 990--an informational tax-return--with the IRS and state charity offices annually. Like private foundations, they can face penalties for providing more than fair market compensation to their "disqualified persons." Federal regulations also limit how much public foundations can engage in political advocacy.



About the Author

Located in the mid-Atlantic United States, Elizabeth Layne has covered nonprofits and philanthropy since 1997, and has written articles on an array of topics for small businesses and career-seekers. An award-winning writer, her work has appeared in "The Chronicle of Philanthropy" newspaper and "Worth" magazine. Layne holds a Bachelor of Arts in journalism from The George Washington University.

Photo Credits

  • Image by, courtesy of Wonderlane