Aside from being able to give back, setting up a charitable organization also gives you tax benefits. When Section 501(c)(3) of the Internal Revenue Code (IRC) qualifies your organization as tax-exempt, its donors can deduct their donations on their tax returns. As such, you’d likely earn more support from your community.
Furthermore, your organization’s qualification in the IRC exempts it from federal and state income tax, with some exceptions. For example, if you set up a private foundation, you’ll typically make donations, a.k.a. “grants” to other charities, instead of hold your own charitable activities. You can also make grants to individuals if you follow IRS rules.
Private foundations share a common goal with public charities, though. The activities of both must benefit the public so that they’d maintain their tax-exempt status.
That said, below are the legal steps to setting up your private charitable organization:
1. Choose a Specific Type of Charity
Like a business, a charity also targets a specific group. The following are some common types of charities and their purposes:
- International non-governmental organizations — a.k.a. “NGO”, these charities provide disaster relief, humanitarian aid, and peace missions
- Human services charities — provide aid to people in need, such as the elderly or children. They usually supply care, food, shelter, or livelihoods
- Education charities — offer a scholarship to less fortunate students
- Religious charities — support specific religions, or promote religious media
- Environmental charities — committed to environmental protection and conservation
- Arts and culture charities — support and promote artistry by setting up museums, performing arts events, or public broadcasting
- Health charities — provide aid to the sick and disabled, or contribute to medical research, or family and patient support
- Animal charities — rescue and protect abused and/or abandoned animals, or conserve wildlife
In your case, since you’re setting up a private foundation, your organization is controlled by a family or a small group of individuals. As such, you are subject to restrictions that don’t apply to public charities. You must also donate at least 5% of your assets’ fair market value to permissible donees each year.
2. Choose a Structure
After selecting a specific type of charity, choose between two structures, namely charitable trust, and nonprofit corporation. The former is easier to start and operate but may not provide its trustees with sufficient legal protection.
On the other hand, a nonprofit corporation provides better legal protection, but are bound by stricter operating requirements. However, they limit personal liability and allow more flexibility in the use of their funds.
If you choose a charitable trust structure, you need to appoint trustees. Otherwise, follow the usual steps for starting a corporation. But either way, the IRS will require you to apply for an employer identification number (EIN), even if you’re not hiring employees. Your EIN will serve as your tax identification number, like what a Social Security number is to an individual.
3. File Organizing Documents to the IRS
To secure your tax exemption, fill out the Application for Recognition of Exemption, or simply Form 1023 under Section 501(c)(3) of the IRS. Prepare all the supporting documents as well, using templates of legal documents to make the task easier. Form 1023 asks for basic information about your organization, and how it will be run and operated. It will also ask you for a fee.
Once you’ve accomplished these three steps, the IRS can approve your tax-exempt status. Afterward, apply for the same status in your state, filing whatever documents are required.
4. Name Your Charity
In reality, naming your charity comes before incorporating your private foundation and applying for exemption. But knowing the requirements firsthand can help you prepare better. After all, it’s more efficient to file all your documents before reaching the more challenging steps.
That said, here are some rules to follow before choosing a name:
- Your private foundation’s name shouldn’t sound similar to or be exactly the same as another corporation.
- It has to end with “Inc.,” “Corp.”, “Incorporated”, “Corporation”, or “Ltd.”
- You shouldn’t end it with prohibited words such as “Federal”, “Bank”, “Insurance”, or “United States”.
In addition, to ensure that your name is unique, do a trademark search on uspto.gov. Check if you can use “.com” or “.org” on your domain, and read some expert advice on naming your startup. Since a private foundation is technically a business, it follows the same rules in naming a startup company.
5. Establish Your Mission
Lastly, compose a short mission statement that must explain the motivation behind your charity, and the group it serves, and how it serves them. In two sentences or less, your mission statement must be compelling. For example, if you’re starting an animal rescue foundation, you could word your mission as “Helping abused, abandoned, and neglected animals find a loving home with the help of compassionate veterinarians, students, and shelter volunteers.”
Setting up a private foundation is an amazing way to give back and promote your advocacy. By making such a courageous change, you’re helping make the world a better place.