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.