Many people regularly set aside a portion of their earnings to give to a good cause. However, if you often give a substantial amount to charity, and if you have the resources and influence to encourage others to do the same thing, why not start up your own charitable foundation? Not only is it good for humanitarian causes, it can be good for you tax-wise as well.
On this website, you’ll find tons of information about starting a charitable foundation. This is geared not only for people who are interested in setting up their own charitable foundations, but for those who are having trouble expanding and growing their foundations. We hope this will also be a valuable resource for investors who want to get background information on charities before they donate to one. We’ll teach you how to start a foundation, how you can fund it, and how to turn it into a successful endeavor, which is a win-win situation for you, and the cause you are advocating.
What is a Charitable Foundation?
A charitable foundation is a nonprofit institution that advocates a cause. These organizations play an important role in preservation and growth of communities, species and ideologies. The life of a charitable foundation lies in the generosity of donors and devotion of volunteers who provide services for the foundation. Some charitable foundations act as an alternative solution to services offered by the government.
A foundation can either accumulate funds and manpower for other charitable causes, or use these resources for their own activities. Foundations can support a number of causes, including cultural, educational, scientific, environmental and humanitarian. If you are planning to start your own charitable foundation, it is important to adhere to the IRS guideline for private and public foundations.
Private Foundations Vs Public Charities
You are operating a private foundation if your financial backing comes mostly from private sources, like a few private individuals, a handful of families or a couple of corporations. You are running a public charity if you are supported by the general public financially and in terms of manpower.
The differences between the two are distinct, and each foundation must be categorized into either one of the two for tax purposes. So what are the main differences between the two? For one, there is more public scrutiny when it comes to public charities, which is a good thing because it makes public charities more transparent and ensures that the charity is doing its job properly and honestly. This is especially important considering government organizations are more lax towards public charities compared to private organizations.
Private foundations are subject to strict federal laws, which have been put into place since 1969. These regulations are meant to prohibit self-dealing and limit the number of shares that can be acquired in any single company. It is meant to regulate financial transactions between the private foundation and its officers and contributors.
While not as strict with public charities, the federal government has now decreed that public charities adhere to the same rules that private foundations are subject to, especially when it comes to payments and grants to organizations and individuals.
Different Types of Private Foundations
Private foundations are further classified into subcategories, depending on how they’re managed and funded. While these are not so important for tax purposes, these classifications serve to differentiate one foundation from another and to explain how the foundation works.
Independent foundations – there foundations are usually funded by a single benefactor, which would be a single individual or an organization. Unlike other types of private foundations, the benefactor simply provides funding and doesn’t govern the foundation.
Family foundations – these foundations are funded by a family of benefactors. With family foundations, one member of the family usually holds a seat at the board and has a say in how the foundation is run.
Corporate foundations – these foundations are funded by a corporation, which is usually the same corporation that created said foundation. As per federal law, corporate foundations are to be treated as a separate entity to the foundation that created and funded it. Corporations usually start foundations not only for branding purposes, but for philanthropy as well. Since the foundation and the corporation are two different entities, it is possible to have corporate employees be beneficiaries of the foundation. For example, employees of the corporation can avail of educational grants for their children.
International foundations – these are foundations whose programs and activities usually cross borders. This can also refer to foundations of International companies who have foundations set up in several countries.
Private operating foundations – while some charitable organizations often create grants or offer funding for other charities, private operating foundations use their resources for their own philanthropic endeavors. However, they may still make grants for certain causes. These foundations are required by law to spend a portion of its assets every year on charitable events.
Type of Public Charities
Similar to private foundations, public charities also have sub-categories, which dictate how they’re funded and which category they fall under in the tax code.
Statutory public charities – these public charities use donations for their own activities rather than issue grants for other causes. These include hospitals, research institutes, schools and churches.
Public charities supported by donations – these charities get a minimum percentage of funding from several donors that come from various sectors, rather than just one benefactor. To be categorized under this, a foundation must pass a public support test which will prove that a fraction of their total funding comes from the general public. Examples of charities under this category include the YMCA, and the Red Cross.
Public charities receiving exempt function income – these charities get their funding from the money they get from the services they offer. Public charities can earn money for their own activities selling tickets, food, admission and other services. While these charities can be self-sufficient, their investment income must not go over one-third of total funding support. Examples of charities under this category include museums and theaters.
Supporting charities – charities under this category don’t have their own activities; instead, they raise funds or manpower to support other charitable foundations. They can support more than one foundation at a time. Supporting charities can make grants, but should follow strict guidelines.
Funding for Charitable Foundations
Financial funding is the lifeline of charitable foundations. Without it, charities can’t organize events, and create grants. Below are just some of the ways by which charities can get the necessary funds for their activities.
Donations and Gifts
The most basic source of funds for charities is gifts and donations from individuals and organizations. While it may look easy at first, it’s actually quite hard to get funds this way. Big, established charities will find it easier to get donations compared to new foundations because the trust factor is there.
Charities that are just starting out may need to send letters of appeal to organizations asking for donations. However, donations don’t come easy- you have to attach documents proving the charity’s legitimacy and plans for any funds that get donated. One benefit to gifts is that they are usually exempt from tax. Here are a few examples of companies that donate to various charitable foundations: Microsoft, Home Depot, Lowes, FedEx, Kroger and Google and there are millions of others too. To find companies to donate to your cause you simply need to ask them, and if you’re just starting out you may find it easier and less intimidating to approach smaller companies first.
Large foundations that have already established themselves as self-sufficient can give smaller, newer foundations financial support by giving them grants. Most grant-giving foundations prefer charities that are just starting out, and will usually steer clear of foundations that are capable of generating funds on their own. As with gifts and donations, you need to present proof that the money from the grant will be put to good use.
Although more common for profit organizations, non-profit organizations like charities can sometimes take out loans to supplement their funding for projects. This is risky, because charities usually don’t have stable sources of income, so getting a loan will be difficult, and gathering funds to pay the loan back may be even harder.
If this is a concern, you can look for an investor willing to offer your charity an equity finance. Instead of having to pay back the investor for the loan, the investor acquires a stake in the foundation instead.
Products and Services
If your charity has a lot of manpower, but not enough funding, you can try selling products and services to raise funds. It is common to see charities conducting their own fundraising events. It could be concerts, plays, or movies, and the ticket sales could go to the foundation. You can also use the talents of your volunteers to produce goods and sell them, like how Girl Scouts sell cookies or certain clubs sell accessories or greeting cards.
Charities can also make use of assets that they have to earn money. For example, if your charity owns a covered court as a meeting ground, you can rent out the covered court during days where you don’t need to meet to raise money.
Contracts are commercial agreements between two parties that state what each party must do to complete the contract. Usually, charities offer work and services in exchange for money. Charities usually do cleanup work after huge events or take part in organized gatherings in exchange for funds. When it comes to contracts, make sure that the clauses don’t clash with your charity’s values and don’t distract you from your actual mission.
You can learn more about how to set up your own charitable foundation by clicking here.