How to start a foundation

Summary:

Starting a foundation is pretty much like starting any sort of nonprofit. The details are probably even more important.

On Wed, 10 Oct 2001, Jane Doe wrote:
What does it take to start a foundation? I would like to start a
foundation. Do I need a business plan and how I plan to disburse funds to a
local non profit?

Is there a check list some place it seems rather daunting, I have
been at the Secretary of State's site and see a list. How long does it
usaully take?

Reply:
Well, as with many things, it depends....

Mostly, it depends on what you want to do.

If you have funds of your own that you plan to use to endow the
foundation, then it can be very simple. I'd start down that path by
talking with staff at the appropriate community foundation. Unless you
have a lot of money to put into this (more than $250,000 is what I've
heard people say, and they usually follow that with something like "it's
better with a lot more), you will probably find that the community
foundation can arrange a donor-advised fund for you that will allow you a
good deal of flexibility, handle all the administrative tasks for far less
cost than you would incur, and can all be done in a few days. (There are
similar services offered by major financial insitutions; you might want to
compare services and fees.) There are lists of community foundations at
The Grantsmanship Center (http://www.tgci.com/resources/foundations/community/)
and the Foundation Center
(http://fdncenter.org/funders/grantmaker/gws_comm/comm.html).

If you are planning to raise money to support your foundation, then it is
a great deal more complicated. You might still be able to use a donor
advised fund at a community foundation, but you would need to ask them
about the requirements if you want to raise money from other people to put
into "your" fund.

Or you can, as your question suggests, set up a separate foundation. This
process is likely to take several months to a couple of years, depending
on many intricacies that only someone who knows your plans, goals and
local conditions can really estimate for you. It is also likely to cost
several hundred to a few thousand dollars, depending on how much outside
advice you need, want and use.

The rules about incorporating foundations vary from state to state.
You will need to incorporate as a first step; everything else follows from
that. Incorporation can be very simple to do, but it needs to be done
exactly right to avoid problems later on down the road.

For example, In order to be eligible to receive tax-deductible donations,
you will need to be sure your corporation meets the requirements the IRS
has developed to implement the Internal Revenue Code, especially section
501(c)(3) -- and there are many other things to think about while setting
up the corporation in the first place.

The you will need to apply for recognition as a tax-exempt entity under
federal tax laws. The form for doing that is IRS 1023; there's a
publication you can get from the IRS, or download from www.irs.gov, called
"Tax Exempt Status for My Organization" (pub. 557), that explains a lot of
this. For this step, you will indeed need a business plan (since you have
to provide a budget, including details of the sources and uses of funds,
for the first three years of your planned program).

Foundations are governed by similar regulations for federal tax and
reporting purposes to those that apply to the more familiar "public
charities" -- the organizations that we all know as "nonprofits." But the
prohibitions on self-dealing are more stringent and all foundations have
to pay an excise tax.

As a fundraiser, you will probably also have to register with and report
to your state's charity officials (usually in the Secretary of State's
office -- see http://www.multistatefiling.org for information
about this subject).

Another option, especially if you are planning to assist just one or a
small number of nonprofits through your foundation, would be to work out
an agreement that allowed you to operate as a "program" of some
established organization. You would be subject to the overall direction
of the sponsoring organization's board, but the agreement could allow
substantial flexibility and scope for you to work on your cause without
having to meet the administrative requirements foundation status would
impose. This structure often goes under the name of "fiscal sponsorship."

The "Start-up" section of the Nonprofit FAQ has lots of information about
all these subjects, and pointers to further information as well. See
http://www.nonprofits.org/npofaq and click on Start-up in the left hand
column.

(If by any chance you're in Washington state, you'll want to get hold of
the King County Bar Association's very useful workbook "How to Form and
Manintain a Nonprofit Organization" -- see
http://www.tess.org/pages/support2.html#publications for advice
about how to do that and other subjects. Many other states have statewide
associations of nonprofits who can connect you with local resources; for a
list see http://www.ncna.org)

Putnam Barber
President
The Evergreen State Society :: http://www.tess.org
Seattle, WA USA