How the Wealthy Start Charitable Foundations
By Alan Olsen
Many of the world’s wealthiest individuals share many common traits and life experiences. They also share a common interest in using their wealth for good. Some of the world’s greatest charitable foundations were founded by some of the wealthiest people, including Bill and Melinda Gates, among others. If you already enjoy giving much of your wealth to good causes then perhaps you should consider starting your own charitable foundation. Starting a charitable foundation is something that really anyone can do, but high net worth individuals obviously have the resources already in hand in order to get started. So how do the wealthy go about this process?
Define Your Purpose
The first thing you need to do is determine the purpose of your private foundation. In other words, what do you hope to achieve with the foundation? Next, you will need to determine the guidelines you plan to follow for making grants to organizations, charities and causes. Your definition is very important because not only will it help guide you and your foundation’s activities, but it will also help you receive tax-exempt status from the IRS.
Which Type of Foundation?
The next big decision is to choose between running your foundation as a non-profit corporation or as charitable trust. While a charitable trust can be easier to create and mange, it doesn’t always offer the trustees the same legal protection as a nonprofit corporation. On the other hand, nonprofit corporations are operated under more stringent requirements, but they do offer more personal liability protection and increased flexibility, which is why they are actually more common. In either case, you will have to apply for an employer identification umber, or EIN, from the IRS, whether you hire employees or not, because it will serve as the tax ID number for your foundation.
Filing the Paperwork
After receiving your EIN you’re still not done with the IRS. The next step is to file all your organizing documents with the tax agency. That includes Form 1023 – Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code – as well as file all the necessary supporting documents that go with it. Essentially, this form will describe your foundation and its purpose, and how it will be organized, managed and operated. When you complete all of this information and the IRS approves your tax-exempt status you might still need to file some additional paperwork in order to receive tax-exempt status from the state in which your foundation is located.
After you’ve organized and established your foundation, the real work begins. You will have to run it much like you would any other corporation and you will have to track all your expenses and income. However, for most people that start their own private foundation they find it to be worth the trouble. Not only is it rewarding to help others, but they also create a nice tax break for themselves at the same time.