BlogOrganizational Management How to Start a Foundation: 7 Simple Steps, Pros & Cons + FAQ Organizational Management How to Start a Foundation: 7 Simple Steps, Pros & Cons + FAQ Author: Marlena Moore January 18, 2024 Contents 🕑 8 min read Establishing a foundation is a meaningful way to financially uplift a cause that’s close to your heart. If you’re feeling ready to take the plunge, then it’s important to understand how to start a foundation that can last for years to come! In this post, we’ll explore: Different types of foundations Whether establishing a foundation is right for you How to start a charity foundation And more! What is a Foundation? A foundation is a type of nonprofit organization that’s created to donate funds and resources to a charitable cause. Unlike other nonprofits, which have multiple ways of supporting their beneficiaries, foundations are exclusively designed to distribute grants. Foundations are often set up in memory of loved ones, and donate sums of money either to other nonprofits or individuals. Scholarships are a great example of the grants foundations provide! As you’re establishing a foundation, it’s important to understand if your entity is public or private: Public vs. Private Foundations Also known as “grant-making public charities”, public foundations: Receive donations from multiple sources (individuals, private foundations, government grants, etc.) Are typically governed by a board of directors rather than the founders Rely significantly on public donations and must meet specific criteria to maintain its charitable status Have more flexible regulations when it comes to grants, investments and public reporting On the other hand, private foundations: Are typically established with funds from a single individual, family or a small group of donors Are often governed by the founders or a closely connected group of people Receive limited public funding and are primarily funded by the founders Have much stricter regulations regarding grants, investments and transparency If you’re looking into how to start a family foundation, private foundations are what you should be looking into! The Pros and Cons of Forming a Foundation There are a few pros and cons to consider before you start a foundation: Pros: You get to decide where your big donations specifically go It’s a meaningful way to honor a family member who has passed Your donations come with tax benefits Cons: It comes with a start up cost Starting a nonprofit is time-consuming Things get complex if you start hiring staff members If you still want to financially support a charitable cause but don’t want to dive into the work of managing a foundation, there are other options out there! For example, you can: Contribute to donor-advised funds Donate planned major gifts to established nonprofits Participate in matching gift programs Provide event sponsorships If you want to know the best way to support local nonprofits, you can always reach out and ask them! This lets you contribute to the causes that need it most without doing the administrative work. How to Start a Foundation in 7 Simple Steps Decided that forming a foundation is the way to go? Here’s how to start a foundation from the ground up! Create Your Mission Statement A mission statement is a short description of your organization’s purpose and how you make it happen. It typically isn’t much longer than one to two sentences, and is a fast way to introduce people to the heart of your foundation. If you’re running a public foundation, your mission statement can help inspire new donors to contribute to your fund. Here’s an example of a mission statement for a memorial foundation: “In honor of Jane Doe, beloved scientist and educator, our foundation is committed to providing scholarships to girls pursuing STEM education.” Choose Your Structure: Trust vs Nonprofit Corporation There are a few different ways you can go about establishing a foundation. Right at the start, it’s important to decide whether you’re going to structure it as a trust or nonprofit corporation. A trust foundation is a charity that manages the transfer of assets (usually belonging to an individual!) to public beneficiaries. It’s typically run less formally, and has fewer state regulations—but it’s much more difficult to change its terms without legal intervention. A nonprofit corporation is more formal, and requires things like articles of incorporation, bylaws and a board of directors. However, it also takes a lot of liability off the founders, and is easily adapted if any changes are needed. Establish your legal and financial team Starting a foundation is committing to working with all of the legal and financial processes that come with becoming a granting body. While there’s a lot you can learn independently, there might be some questions you don’t think to consider, such as what happens to the foundation after you pass on. If you want to take some of the pressure off, hiring the right advisors can help you learn how to start a foundation without panicking! Here are a few people you could explore asking for help: Foundation Attorney: Specializes in nonprofit law, ensuring compliance with regulations, advising on governance and addressing legal issues. Financial Advisor: Provides investment advice and helps manage the foundation’s investment portfolio. Accountant: Handles day-to-day financial transactions, maintains records, and prepares taxes and financial statements. Program Officer: Manages the foundation’s grantmaking activities, assesses proposals and monitors funded programs. Impact Analyst: Evaluates the effectiveness and impact of the foundation’s programs. If you’re running a public foundation with a board of directors, you can also turn to them for any big questions. Better yet, you can bring on directors who have experience with any of the roles lifted above! Apply for an EIN Think of an Employer Identification Number (EIN) as your foundation’s social security number! Also known as your Federal Tax Identification Number or Federal Employment Identification Number, your EIN allows you to: Open an nonprofit bank account Hire employees Submit your 990 returns Getting an EIN is completely free, and can be done by filing IRS Form SS-4. This can either be submitted and obtained immediately online, or by fax or mail. The snail mail route will take about six business days to be processed. Apply for 501c3 status Getting 501(c)(3) status is how your organization becomes exempt from paying federal taxes to the IRS. Private foundations meet the requirements for this status, so all you have to do is apply and submit the right paperwork. To receive tax-exempt status, you can file one of two forms online: Form 1023 is designed for larger organizations with annual gross receipts of more than $50,000 and total assets of more than $250,000. It has a $600 fee associated. Form 1023-EZ is the simplified and streamlined version of the form above, and is made for smaller nonprofits. If you’re just beginning to learn how to start a foundation, this is likely the form for you! It has a $275 fee associated. Check out these instructions from the IRS to make the process easier. Once you’ve filed your forms, you can expect your official letter of determination in about six months! Apply for tax-exempt status in your state Each state has its own rules when it comes to applying for state tax exemption. It’s usually done through the state tax commission, but the IRS State Links for Exemption page will help you find the correct office, filing procedures and annual reporting requirements in every state! Make a Fundraising Plan If you’re starting a public foundation, you’ll need to build up funds from individual donors and private foundations. And that means it’s time to get fundraising! You don’t need to pour a ton of money into building your fund—there are plenty of cheap fundraising ideas that can also raise public awareness about your foundation. To kick off a great fundraising campaign, we recommend: Reaching out to private foundations for partnership Getting media slots to introduce the world to your foundation Holding a kick-off event to build money and energy Running a Giving Tuesday campaign to help fund next year’s scholarships And anything else that gets you on peoples’ radar! The sooner your fund builds up, the stronger your own charitable contributions will be. The magic of foundations is, unlike other types of nonprofit organizations, you don’t need to pour lots of money into operational costs. How the Right Software Can Help Foundations Thrive While foundations don’t have a membership model in the same way other types of nonprofits do, they still can benefit from a set of software solutions! WildApricot’s customer management software can help you: Build a beautiful website for your foundation Collect public donations with secure payment processing Create a database of past donors to connect with in the future Make elegant forms that scholarship candidates can use to apply for (or be nominated for!) funding Set up an automated newsletter for your supporters Setting up a foundation doesn’t have to be a hassle. Sign up for a 60-day free trial with WildApricot to discover how we can make your administrative tasks a breeze! How to Start a Charitable Foundation – FAQ Here are some frequently asked questions about how to start a charitable foundation: How much money do you need to start a foundation? Technically, there’s no set amount of money that’s legally required to start a foundation! However, because your goal is to distribute money to beneficiaries, it’s important to have something in the bank to get you started. According to the Council on Foundations, private family foundations usually have a couple hundred thousand dollars in their endowment fund. This is a statistic rather than a rule, and you don’t need to be extremely wealthy to set up a charity! You just might have smaller scholarships to start with. If you’re starting a smaller foundation, especially if it’s a public foundation, be sure to keep start up costs and fees in mind alongside your fundraising goals. Who regulates foundations? Foundations are regulated by government agencies like the IRS and State Attorneys General. If they’re registered nonprofit organizations, it’s especially important that they follow legal guidelines so they don’t lose tax-exempt status! How does a foundation keep 501c3 status? Like any other nonprofit, a foundation keeps its 501c3 status as long as it doesn’t commit any 501c3 violations including: Private benefit & inurement Excessive lobbying Participating in political activity Collecting Unrelated Business Income Failure to submit annual reports Operation in accord with stated exempt purpose(s) Note paying out 5% of its assets annually How much money does a private foundation need to pay out? Private foundations need to follow the 5% rule, meaning they must pay out 5% of their assets annually. If they fail to do this, they can lose their 501c3 status. Should a foundation have a staff? A foundation doesn’t need a staff, especially if it’s a private foundation run by family members. If your foundation is expanding into a much larger body, a staff could take some of the strain off of your founders. Just make sure you consult with your legal team to make sure you follow the appropriate channels! Creating a Foundation That Will Last We hope this guide has given you more insight into how to start a foundation! Whether you’re honoring the legacy of a loved one or simply devoting energy into a cause close to your heart, know that you’re giving a true gift to others. Related Organizational Management Articles Organizational Management 🕑 9 Min Read Human Resources for Nonprofits Marlena Moore This Week Organizational Management 🕑 4 Min Read Engaging Association Members in Advocacy Initiatives: 3 Tips Marlena Moore Feb 13, 2024 Organizational Management 🕑 11 Min Read 31 Free Nonprofit Webinars for February 2024 WildApricot Feb 1, 2024 The Membership Growth Report: Benchmarks & Insights for Growing Revenue and Constituents Get the report now!