Setting Up A Charitable Foundation

Getting startedThe Planning Stage

Setting up your own charitable foundation is similar to starting your own business. Even if your foundation is nonprofit, there are a lot of legal implications involved.

There are certain things you need to apply and gain approval for. Skipping through important steps could not only shut down your foundation, but put you at odds with the law.

Starting your own charitable foundation does not begin with applying for legal paperwork. You must first brainstorm about how you want your charitable foundation to be. Without at least a basic idea of what you want your foundation to do and what its purpose is, government bodies are more likely to dismiss your application.

First and foremost, you have to have passion and vision. Charity work is not something that stems out of a desire for money, which is how most businesses are started. Instead, charitable foundations are born out of a passion to fight, preserve or advocate something. What will your charitable foundation focus on? What causes will you advocate? What is your primary purpose? Will your foundation perform charitable activities or does it simply exist to support other established charities? These are the questions you must ponder over before you start putting things on paper.

Articles of Incorporation

You could leave your charity unincorporated, but it is better to incorporate it for legal purposes. When you incorporate your charitable foundation, it means your charity is its own entity that is separate from you and other members. This means that any asset and resource gained by the charity belongs to the charity, not you. However, this also protects you from having to assume and liability and obligation that the charity gets. If your charity is unincorporated, if it runs into any debt, you have to pay for the debt with your personal assets.

To create you own articles of incorporation, go to the website of your Secretary of State and download the forms there. States may have various requirements for the articles of incorporation, so make sure to use ones designed for your state. The articles of incorporation must include your charitable foundation’s name, its purpose, structure and duration of existence.

Charity Status

You have to decide whether you want your charitable foundation to attain charity status. Contrary to popular belief, not all charitable foundations will have a charity status; instead, a charity status goes on top of your organization’s non-profit status. This is because some foundations will have non-charity activities. For example, if your board of directors are entitled to payments or if your organization observes distribution of profit, these are considered non-charitable benefits.

Federal Employer Identification Number

Charitable foundations are still organizations, so you are still required to have a Federal Employer Identification Number, or EIN. The IRS will use this number to categorize your organization for tax purposes. All grant submissions and IRS forms will ask for your EIN, so this form is very important. You can download the form online at the IRS website.

Apply For Tax Exemptions

As a charitable foundation, you are entitled to tax exemptions as stated by the law. You need to apply via the IRS to have your organization officially recognized as a charitable organization. You must fill out form 1023, where you have to disclose what your charitable organization does. To apply for exempt status, your charitable foundation must have charitable activities in the following areas:

Religious

Scientific

Educational

Philanthropy

Prevention of cruelty

Public safety

After you apply for exempt status with the IRS, you need to file additional paperwork to ensure tax-exempt status from the State. Different states have different tax-exempt clauses, so check with your Secretary of State. You will be asked for your articles of incorporation and your organization bylaws before they give you tax-exempt status.

Membership and Board of Directors

According to the constitution of organizations, members and governing bodies are entitled to hold stakes of the foundation. It is possible that members can also serve as members of the board.

Just to avoid confusion, members in this context does not mean someone who is included in the organization. Members are defined in this sense as someone who holds power in an organization and is entitled to receive benefits from the organization.

Charitable foundations must define their board or directors (or board of trustees) and other members with voting rights. Major benefactors will always have a representative on the board of the charity. Charity foundations must also have an advisory that is headed by a voluntary consultant with an extensive background on nonprofit organizations.

Click here for “The Big 3”; the world’s largest charitable foundations.

Click here to learn how to verify the legitimacy of a charity.