SHOULD I SET UP A FOUNDATION OR NONPROFIT?

A foundation is created with the purpose of making grants to organizations, institutions or individuals for (usually) a charitable purpose. Your foundation can be established either as a nonprofit corporation or a charitable trust, depending on your needs and resources.

PRIVATE VS PUBLIC FOUNDATIONS
There are essentially two different kinds of foundations, private and public.

Private foundations obtain their money through private means such as family, individual or corporate funds. For example, the Ford Foundation is funded by the Ford Corporation.

Public foundations, also called grant-making public charities, obtain their money from various sources such as other foundations, individuals, and government agencies.

SETTING UP A FOUNDATION
There are three main steps to setting up a foundation. The first is deciding what the foundation aims to accomplish. To do this, there are numerous questions that need to be answered like:

  • Why are you forming the organization?
  • What will be the funding sources? Should your foundation be public or private?
  • How will the foundation sustain itself?

Additional questions to consider can be found on NEO Law Group’s blog.

The next step is to choose your organizational structure. It is important to fully understand at least the basic legal rules and regulations in the state and local community that your foundation is being formed. We strongly recommend meeting with your legal advisor in this process. The legal guidelines you are required to follow depend on whether your foundation is formed as a trust or a corporation. A trust tends to be less formal and has fewer government requirements. However, it may be difficult to make changes to your mission and grant making as a trust. A corporation is far more formal as it requires a lot more legal work, but the benefits of this structure include greater protection from personal liability and more flexibility in what the organization can do with its money.

Finally, if setting up a nonprofit foundation, you must file a 501(c)(3). This is a federal tax exemption for nonprofits that ensures the foundation does not need to pay taxes on any income related to the nonprofit. If you register your foundation as a public nonprofit, this filing status also allows those who donate to your foundation to take a tax deduction for their contribution. It is up to the IRS to determine if your organization qualifies as a 501(c)(3), if it is considered private or public, and what legal and tax status it holds.

More information on creating a foundation can be found at Nolo.com. Also, the Council on Foundations is a great resource for people who want to start and run a foundation. 

Structuring Your Philanthropy

Foundations, NonProfits, Public Charities, NGOs: Which Is Right For You? 

 

Understanding the different giving vehicles will help you choose a structure that is best suited to your needs and resources. Each structure varies in terms of its legal requirements, tax benefits and in the control it allows a benefactor.

FOUNDATION:
There are two types of foundations, a nonprofit corporation or a charitable trust. Generally, a foundation is a non-governmental organization (NGO) that makes grants to charitable causes of their choice. Foundations allow a donor a good amount of control over the use of their funds, particularly as compared to that of public charities.

  • A nonprofit corporation is formed to carry out a specific mission, usually charitable but could include other causes such as scientific research. Nonprofits do not pay federal or state income taxes on profits they makes from their mission-related activities.
     
  •  A charitable trust is a set of assets that a donor can either sign over to a particular organization or group or use to create a charitable foundation. They are not tax exempt. There are two different kinds of charitable trusts, remainder trusts and lead trusts.

♦  In a remainder trust, the assets are signed over to a charitable organization at a specific period of time—this can be months, years, or any pre-determined date. Until that date, it generates a potential income stream for you or your beneficiaries. At the end of this period, the remainder of the assets go to the one or more charities you have selected.

♦  A lead trust is often explained as the opposite of a remainder trust. It generates a potential income stream for the nonprofit organization of your choice until it expires, at which point the remaining assets go to any beneficiary you listed, such as your children.

NONPROFIT:
Nonprofit is a common term for organizations that, according to tax code, are classified as a charitable. Nonprofits must benefit the broad public interest, not just the interests of their members.

PUBLIC CHARITY/ 501 (c)(3):
Public charities or 501 (c)(3)s contribute some form of direct charitable activity, such as giving to churches, private schools and shelters. However, in order to classify as and maintain public charity status, a 501 (c)(3) must be organized for exclusively charitable purposes. This means no part of the net earnings of the organization can benefit a private shareholder or individual. Also, a public charity must represent the public interest by having a diversified board of directors.

More than 50% of the board must be unrelated and not compensated as employees of the organization.

A charity generally enjoys additional advantages to that of private foundations, including higher donor tax-deductible giving limits and the ability to gain more support from other public charities and private foundations. Tax filing requirements depend on the annual revenue of the charity. Details and forms can be found on the IRS website.

NGO:
A non-governmental organization (NGO) is a non-profit, volunteer group organized by citizens at a local, national or international level. NGOs perform a variety of service and humanitarian functions around various issues such as health, human rights and advocacy. While NGOs can be created at any level, the title is typically held for those at the international level. They play an important role in developing society, improving communities and promoting citizen participation.

These are just a few options available to you as a donor. We strongly recommend exploring these options and the others available to you with the assistance of your legal, financial and philanthropic advisors. If you ask, these advisors will meet with you as a team to discuss the best course of action from all perspectives. Just as choosing the right investment vehicles is essential, it is important to explore all possible giving vehicles available to ensure that you are making the right philanthropic investments for you and your time, talent and treasure.