Document 6485372

1: ASSOCIATION OF SMALL FOUNDATIONS
Primer Series
Brief papers on hey small foundation topics
How to Start a
Private Foundation
By Sara Beggs, Association of Small Foundations
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Association of Small Foundations Primer
Series 13
120 staff
allfoundations.org
How to Start a Private Foundation
By Sara Beggs, Association of Small Foundations
ASF Primer Series Editors: Andy Carroll and Joseph Foote
Table of Contents
Educate Yourself About Various Charitable Vehicles
Determine the Type of Private Foundation
Structure the Foundation as Either a Charitable Trust or a Nonprofit Corporation
Establish Your Foundation with the State
Obtain an Employer Identification Number
Apply to the IRS for Tax-Exempt Status
Register With the Attorney General's Office, If Necessary
Operate Your Private Foundation According to the Laws
IX.
Conclusion
DISCLAIMER: The Association of Small Foundations cannot be held liable for
the information provided in this Primer. We strongly encourage you to consult your attorney to
ensure compliance with federal and state laws and regulations.
I. Educate Yourself About Various Charitable
Vehicles
Generally, a private foundation has four characteristics:
It is a charitable organization;
It is initially funded from one source (usually an individual, a married couple, a family or
a business);
Its ongoing income derives from investments (in the nature of an endowment fund); and
It makes grants to other charitable organizations rather than operating its own program
(except in the case of a private operating foundation).
If you have not identified a funding source for your endowment but have a great program idea,
you may actually be more interested in forming a public charity rather than a private foundation.
You can find information on forming public charities in Starting a Nonprofit Organization at
www.boardsource.org . Visit the E-Books section of their Bookstore to view and download the
publication.
Even if you have funds to put toward a charitable purpose, you should consider the advantages
and disadvantages of starting a private foundation versus using some other giving vehicle. For a
summarized comparison of some of your main options, see the following two links:
http://www.goulstonstorrs.com/uploadedFiles/Newsstand/Media_Articles/chart.pdf
http://wvvw.nyrag.org/info-url nocat3756/info-url nocat_show.htm?doc_id=140254
If you would like more information on the foundation option. we recommend consulting the
book First Steps in Starting a Foundation, by John Edie and published by the Council on
Foundations. We also strongly recommend consulting an estate planning attorney or an attorney
concentrating in tax-exempt organizations.
© 2006, Association of Small Foundations. All rights reserved. www.smallfoundations.org .
II. Determine the Type of Private Foundation
If you determine that a private foundation is the appropriate charitable vehicle for you, you must
then consider the type of private foundation that most appropriately matches your long-term
goals and capabilities. The Internal Revenue Service (IRS) distinguishes among three different
types of private foundations, which are further described below. The descriptions below,
however, are simply overviews and not comprehensive analyses of the regulations governing
these entities. Although the initial foundation structure can be changed, it can be a complicated
process and should only be done with the aid of an attorney and accountant.
A. Standard Private Foundations
Standard private foundations, also referred to as private non-operating foundations, are the most
common form of private foundation. Standard private foundations vary in size and purpose. They
typically obtain funding from a single bequest, or may receive annual contributions from an
individual, group of individuals, or members of a family. The primary purpose of standard
private foundations is to make grants to public charities, rather than operate any substantial
programs. Standard private foundations must spend an amount equal to at least 5% of its net
investment assets on qualifying grants and administrative expenditures annually. Corporate
foundations follow the same regulations as standard private foundations, but the funding source
of a corporate foundation is a business, rather than a family or individual.
1. Tax Deductibility of Gifts to a Standard Private Foundation
Cash Gifts. When a donor makes a cash gift to a standard private foundation, his or her
tax deduction is limited to 30% of the donor's adjusted gross income, with a 5-year
carryover privilege for amounts in excess of the 30% limit.
Gifts of Appreciated Property. A donor's deduction for gifts of appreciated property,
such as closely held stock and real estate, to a standard private foundation is limited to
the property's adjusted basis, which is generally the cost of the property. A donor's
contribution of most publicly traded stock to a standard private foundation, however, is
deductible up to the stock's fair market value. In addition, a donor's deduction for all
gifts of appreciated property is further limited to 20% of his or her adjusted gross income,
with a 5-year carryover privilege for amounts in excess of the 20% limit.
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2006, Association of Small Foundations. All rights reserved. www.smal I foundations.org .
2. Tax Deductibility of Gifts to a Standard Private Foundation Compared with Tax
Deductibility of Gifts to a Public Charity
Donors are entitled to more liberal tax deductions for gifts to public charities than for gifts to
private foundations.
Cash Gifts. A donor's tax deduction is limited to 50% (rather than 30%) of the donor's
adjusted gross income for cash gifts to a public charity, with a 5-year carryover privilege
for amounts in excess of the 50% limit.
Gifts of Appreciated Property. Contributions of appreciated property to a public
charity are deductible at their full fair market value, except that contributions of
appreciated tangible personal property must be related to the public charity's exempt
purpose, or else the donor is limited to deducting his or her basis in the property. A
donor's tax deduction is limited to 30% (rather than 20%) of the donor's adjusted gross
income for gifts of appreciated property to a public charity, with a 5-year carryover
privilege for amounts in excess of the 30% limit.
Please note that the above limitations apply only to lifetime gifts. Bequests, whether to a
private foundation or a public charity, are fully deductible from the donor's estate.
B. Private Operating Foundations
Private operating foundations, although still usually funded primarily by one source, use the bulk
of their resources to carry out their own charitable programs, rather than making grants to other
charitable organizations. To qualify as an operating foundation, the organization must spend at
least 85% of its annual adjusted net income or its minimum investment return for the operation
of its charitable activities and meet certain tests set forth in the Internal Revenue Code of 1986,
as amended (Code).
Although a private operating foundation is subject to most of the excise tax rules to which a
standard private foundation is subject (further described below), a major benefit is that donors to
a private operating foundation may take advantage of the more liberal income tax deduction rules
generally applicable to gifts to publicly supported charities. In other words:
a) Cash Gifts. A donor's deduction is limited to 50% (rather than 30%) of his or her
adjusted gross income for cash gifts to an operating foundation, with a 5-year carryover
privilege for amounts in excess of the 50% limit.
h) Gifts of Appreciated Property. A donor's deduction is limited to 30% (rather than
20%) of his or her adjusted gross income for gifts of appreciated property to a private
operating foundation, with a 5-year carryover privilege for amounts in excess of the 30%
limit. Perhaps more importantly, contributions of appreciated property to a private
operating foundation are deductible at their full fair market value, except that
contributions of appreciated tangible personal property must be related to the public
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© 2006, Association of Small Foundations. All rights reserved. www.smallfoundations.org .
charity's exempt purpose, or else the donor is limited to deducting his or her basis in the
property.
C. Pass-Through or Conduit Foundations
Conduit foundations are similar to standard private foundations because they do not directly
operate charitable activities. However, the key difference is that none of the donations to a passthrough foundation can be used to build an endowment. Instead, all of the gifts (plus all of the
foundation's income) must be distributed to public charities within 2-1/2 months after the end of
the tax year in which the donor made the gift to the foundation.
A conduit foundation offers a donor the same tax deductions as an operating foundation and a
public charity:
Cash Gifts. The donor's tax deduction is limited to 50% of his or her adjusted gross
income for cash gifts to the conduit foundation, with a 5-year carryover privilege for
amounts in excess of the 50% limit.
Gifts of Appreciated Property. The donor may deduct up to 30% of his or her adjusted
gross income for property gifts of appreciated property to the conduit foundation, with a
5-year carryover privilege for amounts in excess of the 30% limit.
Typically a donor would choose a conduit foundation if the donor wants to establish the
foundation structure and take advantage of more liberal tax deductions, but does not want to fully
fund the foundation until his or her death.
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© 2006, Association of Small Foundations. All rights reserved. www.smallfoundations.org .
III. Structure the Foundation as Either a
Charitable Trust or a Nonprofit Corporation
Once you have decided upon the type of foundation, you should determine whether to structure the
foundation as a trust or a nonprofit corporation. Below is a brief explanation of the advantages and
disadvantages of each entity, which will vary somewhat depending on state law. However, legal
counsel should further assist you in your decision and should assist you in the necessary filings.
A. Charitable Trusts
A private foundation organized as a charitable trust is governed by a trust agreement that
appoints the initial trustees, designates the trustees' initial powers, and provides for the future
selection of trustees to manage and operate the foundation.
Advantages of Charitable Trusts Over Nonprofit Corporations
Trusts are typically simpler to create and operate than corporations. Trusts have fewer
requirements concerning trustees, state filings, regularity of meetings, minutes, etc. Trusts also
have lower taxes for any unrelated business income.
Disadvantages of Charitable Trusts Compared With Nonprofit Corporations
Trusts generally offer less flexibility than nonprofit corporations. For example, court approval is
generally required for any changes to the trust agreement. For some people, however, this
inflexibility may be desirable to ensure their funds stay directed towards a specific cause or
charity. In addition. because trustees are subject to restrictions relating to the delegation of their
duties, trustees may be required to be more directly involved in the foundation than directors of
nonprofit corporations. Trustees also may have less protection than corporation directors in the
case of ill-advised decisions. Lastly, trusts can receive deductible donations from corporations
only if they are to be used within the United States.
B. Corporations
A private foundation organized as a nonprofit corporation must normally file Articles of
Incorporation with the state Secretary of State. A nonprofit corporation is governed by a board of
directors that elects officers and carries out and properly records the foundation's activities.
1. Advantages of Nonprofit Corporations Over Trusts
Nonprofit corporations offer a tremendous amount of flexibility that is not present in the trust
structure. For example, revising the governing documents such as the Articles of Incorporation
and bylaws is relatively easy and allows the foundation to operate in a manner that is responsive
to community needs. A nonprofit corporation also generally provides directors with greater
protection from personal liability.
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0 2006, Association of Small Foundations. All rights reserved. www.smallfoundations.org .
2. Disadvantages of Nonprofit Corporations Compared With Trusts
Nonprofit corporations have more formal operating requirements than trusts and are therefore
slightly more difficult to create. As mentioned above, a nonprofit corporation is required to file
Articles of Incorporation with the state Secretary of State. Many states also require regular
meetings. minutes, and annual reports.
*********
Because of the great flexibility and liability protection, the corporate structure is used more often
than the trust structure.
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© 2006, Association of Small Foundations. All rights reserved. www.smal I foundations.org .
IV. Establish Your Foundation with the State
Because trusts and nonprofit corporations are regulated by state law rather than federal law, you
must follow the specific state tiling requirements when creating a foundation. Below are some of
the general state filing requirements, but it is very important to adhere to the specific Mint;
requirements in the foundation's state of organization. Further, because a nonprofit corporation is
more common than a trust as a foundation structure, we will more specifically describe the steps
necessary to develop a nonprofit corporation.
A. Establishing a Trust
To create a trust, you should consult with a qualified estate planning attorney or an attorney
concentrating in tax-exempt organizations. The trust document should include the following
information:
The name(s) of your trustee(s);
A statement of the charitable purpose;
Distribution guidelines for ongoing grantmaking and the potential dissolution of the trust;
Name(s) of successor trustee(s) or an outline of a process for trustee selection;
A statement of the term of the trust, if any;
A clause prohibiting private inurement and lobbying; and
Statements that the foundation will abide by sections 4941 through 4945 of the Code.
B. Establishing a Nonprofit Corporation
Articles of Incorporation
Bylaws
Hold an Organizational Meeting
Minute Book
Each of these is described below.
1. Articles of Incorporation
The first step in organizing a nonprofit corporation is to draft the Articles of Incorporation (also
sometimes referred to as Articles of Organization) and file the Articles with the state Secretary of
State. The Articles of Incorporation serve as the formal document that establishes the foundation.
You must file the Articles of Incorporation with the state Secretary of State or other appropriate
state office and enclose the required filing fee. The amount of the filing fee depends on the state
of incorporation. If you request expedited filing (which increases the filing fee), the state will
likely approve the filing within 1 or 2 days; if you do not request expedited filing, the state may
take about 3 to 4 weeks to approve the filing. Once the filing is approved, the corporation is
considered in existence.
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C) 2006, Association of Small Foundations. All rights reserved. www.smallfoundations.org .
Articles of Incorporation generally should include the following provisions:
Corporation Name
Purpose of Organization
Registered Agent and Address
Incorporators' and/or Initial Directors' Names and Addresses
e) Provision for Asset Distribution Upon Dissolution
0 Method for Amendment of the Articles of Incorporation
Clauses Prohibiting Lobbying, Political Campaigns, and Private Inurement
Adherence to Code Sections 4941 through 4945
Each of these is described below.
Corporation Name
Some foundations choose a name recognizing the family or company that provided the original
source of funding (e.g., The Judith L. Weymouth Foundation, The Pearle Vision Foundation).
Other foundations choose a name that will highlight the cause or mission of the organization
(The Foundation on Aging or Youth Development Foundation). Once you have selected a name,
you should confirm that the name is available with the state of incorporation.
Purpose of Organization
Federal law requires every foundation's existence to be for religious, charitable, scientific,
testing for public safety, literary, or educational purposes. The purpose of the foundation must be
described in the Articles of Incorporation. Some states allow a very general purpose statement;
other states, such as Massachusetts, require at least one specific purpose. A broad purpose
statement in the Articles allows for maximum flexibility, which may minimize revisions (and
legal fees) over time. On the other hand, a more specific purpose may help direct future directors
in maintaining the initial mission of the foundation.
Registered Agent and Address
States require that a resident agent be designated in the Articles of Incorporation. The purpose of
the resident agent is to receive the service of process if the foundation were to be sued for any
reason. Your lawyer or accountant may serve as the foundation's registered agent. In addition,
various companies may act as your registered agent.
Incorporators' and/or Initial Directors' Names and Addresses
This information is public, so consider whether to use a home or office address.
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© 2006, Association of Small Foundations. All rights reserved. www.smal I foundations.org .
e) Provision for Asset Distribution Upon Dissolution
The Articles of Incorporation must contain a clause providing that at the foundation's
dissolution, all the assets shall be disposed of for charitable purposes (the clause may either
identify specific charities, or indicate that the board of directors will have discretion to determine
the charitable beneficiaries). Some states have provisions providing that the corporation will be
automatically dissolved if the corporation fails to file the necessary state documents (such as
annual reports) in a timely manner.
1) Method for Amendment of the Articles of Incorporation
Include a statement detailing the way in which to amend the Articles.
Clauses Prohibiting Lobbying, Political Campaigns, and Private Inurement
Include a statement that states the foundation will not make the prohibited expenditures above.
Adherence to Code Sections 4941 through 4945
The Articles must include a statement that the foundation will comply with the requirements of
sections 4941 (self-dealing), 4942 (required distributions), 4943 (excess business holdings), 4944
(jeopardy investments), and 4945 (taxable expenditures) of the Code.
2. 13N laws
After the Articles of Incorporation are filed, you must prepare the bylaws. The bylaws specify
the operations and rules of conduct for the foundation. Once again, each state will have its own
specifications with respect to the content of the bylaws. For example, many states have specific
requirements such as the minimum number of board members, frequency of board meetings, etc.
Your attorney can draft these provisions for you, but you should be involved in the process,
especially when state law allows for flexibility in the bylaw provisions. You should follow the
laws of the state where the foundation is incorporated.
Common elements of bylaws include:
Officers and Directors
Meetings of Directors
Meetings of Members
Other Duties
Each of these is described below.
a) Officers and Directors
The general powers of the board of directors;
The responsibilities, number, and length of the term of the directors, as well as the method
for selecting, replacing, and removing directors;
Compensation of the directors, if any;
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© 2006, Association of Small Foundations. MI rights reserved. www.smallfoundations.org .
The number, title and duties of the officers (such as president, vice-president, secretary, and
treasurer) and terms of office, as well as the manner of electing and removing officers and
filling vacancies; and
A provision indemnifying officers and directors and establishing the rights of indemnified
individuals.
b) Meetings of Directors
Notice requirements needed to call meetings, the meeting schedule, and definition of a
quorum;
Voting requirements and the manner, if any, for taking informal actions;
Whether standing committees will be established and if so, what type of standing committees
will be established; and
A provision allowing for the creation of ad hoc committees.
c) Meetings of Members
A statement as to whether the foundation will have a member structure. A membership
structure gives special status to certain individuals, who may or may not be directors
themselves. A member usually selects the directors and therefore has ultimate control over
the foundation;
If the foundation does have members, the powers of the members, the responsibilities of the
members, the number of members, and length of the term (if any) of the members, as well as
the method for selecting, replacing, and removing members; and
If the corporation does have members, the date for the annual meeting and the requirements
for calling special meetings.
d) Other Duties
A list of the officers that have the power to handle assets and bind the foundation with
respect to contracts, loans, checks, deposits, investments, and expenses;
A statement regarding the tax year of the foundation (whether a calendar or fiscal year); and
The procedures for amending the bylaws.
Bylaws are not static, and the board should review them regularly. Bylaws should accurately
reflect how the foundation operates and should remain relevant. Accordingly, it may be
necessary to amend the bylaws periodically. Keeping bylaws simple in language and content can
help ease this process. Some foundations appoint a task force to review the bylaws and make
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© 2006, Association of Small Foundations. All rights reserved. www.smallfbundations.org .
suggestions for revision to the whole board. After the bylaws are revised, they should be
approved by the full board. The date of the board approval should be indicated on the revised
bylaws.
3. Hold an Organizational Meeting
After the Articles of Incorporation are filed and the bylaws are drafted, your foundation must
have an organizational meeting to accomplish the following tasks:
Adopt the bylaws;
Elect directors and officers (if not specified in the Articles of Incorporation);
Adopt the corporate seal, if you have one or if required by the state;
Adopt a resolution permittin g the opening of appropriate bank accounts and specifying
signing authority, and sign bank signature cards;
Establish the foundation's fiscal year, if not specified in the bylaws;
Authorize payment of initial expenses; and
Authorize officers to file for tax exemption.
The secretary should take minutes of the organizational meeting as well as all future board of
directors' meetings.
4. Minute Book
The secretary should create and retain a minute book that will include the foundation's Articles
of Incorporation, bylaws, and minutes of all of the meetings.
************
Although establishing and operating a nonprofit corporation appears to be a lot of work, the
reward, as stated above, is that a nonprofit corporation is more flexible than a foundation
structured as a trust.
V. Obtain an Employer Identification Number
Even if the foundation does not have any current or anticipated employees, the foundation must
obtain an employer identification number. To obtain an employer identification number, you
should complete Form SS-4, "Application for an Employer Identification Number." You can
locate and complete Form SS-4 online by visiting the IRS's Web site at www.irs.gov . Follow the
links from the homepage to Forms and Publications. You can download the form by its number.
© 2006, Association of Small Foundations. All rights reserved. www.smallfoundations.org .
VI. Apply to the IRS for Tax-Exempt Status
After you have completed the steps above, you must apply to the IRS for tax-exempt status. To
obtain the necessary forms to apply for tax exemption, you may contact the IRS by calling 877829-5500, or download the forms from the IRS's Web site at www.irs.gov . Follow the links from
the homepage to Forms and Publications. You can download the form by its number.
A. Form 1023 — Application for Recognition of Exemption
You must apply to the IRS for tax-exempt status by completing Form 1023: "Application for
Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code." Because of
the comprehensiveness of Form 1023, an estate planning attorney, an attorney concentrating in
tax-exempt organizations, or a qualified accountant should help you complete the document.
Form 1023 requests information about the foundation such as the following:
Purpose and activities;
Main sources of financial support;
Plans for fund-raising, if any;
Contact and compensation (if any) information for directors or trustees;
Potential lobbying or political activities;
Type of grantmaking along with any special grantmaking plans (such as providing
scholarships, which will require detailed procedures);
Current year revenue and expenditures;
Proposed estimated budget for the next 2 years (you aren't bound by this budget); and
Articles of Incorporation and bylaws or trust document.
If you submit the Form 1023 within 15 months of the date the foundation was formally organized
(i.e., the date the Articles of Incorporation were filed or the trust was established), the
foundation's tax-exempt status will be retroactive to the date of incorporation of the nonprofit
corporation or the establishment of a trust. If Form 1023 is filed after the 15-month period (and
any extensions), the foundation's tax-exempt status will begin on the date of IRS approval. A
page-by-page guide to Form 1023 is available at http://www.form1023help.com .
B. Form 8718 - User Fee for Exempt Organization Determination Letter
When you file Form 1023 with the IRS, you must include Form 8718: User Fee for Exempt
Organization Determination Letter, which can be found at www.irs.gov . You must also include
the proper user fee. Follow the links from the IRS's homepage to Forms and Publications. You
can download the form by its number.
C. IRS Determination Letters
Once the proper documents are filed with the IRS, you simply wait for your IRS determination
letter, which you should receive in approximately three to five months. You may be required to
answer additional questions before it is issued.
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© 2006, Association of Small Foundations. All rights reserved. www.smallfoundations.org .
Register with the State Attorney General's
Office, If Necessary
Many states require charities to register with the state Attorney General's office, in addition to
incorporation with the Secretary of State's office. You should check the requirements of any
state where your foundation will be operating and register appropriately with the state.
Operate Your Private Foundation According to
the Laws
Although standard private foundations provide donors with numerous benefits, they are also
subject to several important restrictions and taxes, as described below.
Please note that this overview is just that—a review of the main rules governing private
foundations. The ASF Primer Legal Essentials for Small Foundations and Foundation in a Box
offers additional information on legal matters. Also, ASF recommends that all foundations
consult with legal counsel on an ongoing basis to get answers to specific questions. ASF's
Professional Directory for Foundations lists attorneys nationwide who have been nominated by
members as being experienced in foundation work.
This section has two parts:
File the Appropriate Tax Forms
Adhere to the Main Rules Related to Private Foundations
A. File the Appropriate Tax Forms
Form 990-PF
This is the foundation's annual federal tax return, with detailed financial activity. If a tax
deadline passes during the time you are waiting for your tax-exempt status recognition, you must
tile a Form 990-PF with the Internal Revenue Service (IRS) and state authorities as if your
federal tax-exempt status had been granted.
Form 990-T
A foundation must file this form if it receives $1.000 or more in gross income from an unrelated
trade or business or debt-financed income.
3. Form 8109
File this form with estimated quarterly tax payments for the excise tax on investment income
(file only if paying annual tax over $500).
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© 2006, Association of Small Foundations. All rights reserved. www.smallfoundations.org .
Possible Additional State Requirements
The federal Form 990-PF must be filed with the state of incorporation, as well as the state of
your principal office. Many states also have additional reporting requirements.
Employment-Related Filings
The above does not include forms filed quarterly related to employment tax withholding,
retirement fund accounts, or non-employee compensation.
B. Adhere to the Main Rules Related to Private Foundations
Sections 4940 through 4945 and 6104 of the Code contain rigorous rules regarding the
governance of standard private foundations and private operating foundations.
Remember: You must follow state laws as well, which are becoming more demanding in many
cases.
More information on tax and legal rules is in ASF's Primer, Legal Essentials for Small
Foundations, available at www.smallfoundations.org .
This section has seven parts:
Section 4940 Excise Tax Based on Investment Income
Section 4941 Taxes on Self-Dealing
Section 4942 Taxes on Failure to Distribute Income (5% Payout)
Section 4943 Taxes on Excess Business Holdings
Section 4944 Taxes on Investments That Jeopardize Charitable Purpose
Section 4945 Taxes on Taxable Expenditures
7. Section 6104 Public Disclosure Rules
1. Section 4940 Excise Tax Based on Investment Income
Foundations are responsible for paying an excise tax on their investment income each year. For
tax returns filed after August 17, 2006, foundations must pay this excise tax on an expanded list
of types of investment income. See the Legislative Update page at www.smallfoundations.org for
more information.
The tax is usually 2% of net investment income, though it can be reduced in certain cases to 1%.
If the annual estimated tax is expected to be $500 or more, the excise tax must be paid quarterly,
on dates set by the Code corresponding to your fiscal year.
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© 2006, Association of Small Foundations. All rights reserved. www.smallfoundations.org .
2. Section 4941 Taxes on Self-Dealing
The basic rule is that any direct or indirect transaction between a private foundation and a
disqualified person is prohibited, unless it is permitted under a specific exception. A partial
listing of disqualified persons includes: officers, directors, trustees, substantial contributors to the
foundation, an owner of more than 20% of a business that is a substantial contributor to the
foundation, and any member of the family of any such manager, substantial contributor, or
owner, including ancestors, spouses, and direct descendents. You should check with legal
counsel for a complete list of disqualified persons. Some of the direct or indirect transactions
include:
Sale, exchange, or lease of property;
Lending of money or extension of credit;
Furnishing goods, services, or facilities;
Satisfying a disqualified person's enforceable pledge; and
Transferring the foundation's assets or income to a disqualified person, or use for the benefit
of such a person. (Exception: trustees/directors can be compensated for some services, and
family members can be hired as staff, if both the services performed and compensation are
necessary and reasonable.)
3. Section 4942 Taxes on Failure to Distribute Income (5% Payout)
Every year private foundations must distribute an amount equal to at least 5% of their assets for
qualified charitable purposes. Qualified charitable purposes include, but are not limited to,
grants, reasonable administrative expenses, and direct charitable activities. Expenditures made to
produce income (investment management fees, etc.) cannot be included. Legislation enacted in
2006 also prohibits private foundations from counting grants to certain supporting organizations
as part of their 5% payout (supporting organizations are classified as (509)(a)(3) public
charities). See the FAQs at vvww.smallfoundations.org for more information.
Section 4943 Taxes on Excess Business Holdings
Generally, a foundation together with its disqualified person(s) cannot collectively own more
than 20% of any business enterprise, whether incorporated or unincorporated. If you can satisfy
the IRS that effective control of a business enterprise is in an individual or entity other than the
foundation and its disqualified persons, a 35% limit may be substituted for the 20% limit.
Section 4944 Taxes on Investments That Jeopardize Charitable Purpose
A foundation may not invest either its income or principal in a manner that may jeopardize its
ability to carry out its charitable purpose. No specific investments or investment policies are per
se prohibited under this statute; trustees and directors must make prudent decisions about the
foundation's investments.
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© 2006, Association of Small Foundations. All rights reserved. www.smallfoundations.org .
6. Section 4945 Taxes on Taxable Expenditures
Foundations are liable for taxes on certain expenditures that are 1) prohibited; or 2) in an IRSspecified area without following the respective IRS rules. These are called taxable expenditures.
The following are prohibited:
Non-charitable expenditures;
Influencing public elections; and
Lobbying.
The following grants require special steps to be compliant:
Grants to individuals;
U.S. or foreign organizations that are not public charities;
Grants to certain supporting organizations; supporting organizations are classified as
(509)(a)(3) public charities;
Voter registration; and
Public policy or advocacy efforts.
Note: The law allows foundations considerable leeway in this area, however. See ASF's
Primer Funding and Engaging in Advocacy.
7. Section 6104 Public Disclosure Rules
Private foundations are required to make the following information accessible for public
inspection upon request:
The foundation's three most recent years' Forms 990-PF (including names and addresses of
contributors and trustees of the foundation);
The foundation's initial IRS Form 1023 (application for tax-exempt status) and all related
correspondence; and
The foundation's 990-T (unrelated business income tax return, if any).
More information on public disclosure rules for foundations, including how you can use the Web
to fulfill disclosure responsibilities, is in ASF's Primer, Keeping Good Records: Small
Foundations' Guide to Staying Organized, available at www.smallfoundations.org .
IX. Conclusion
Private foundations, if operated correctly, can provide significant benefits to individuals, families
and companies. They provide tax benefits to taxpayers and enable them to build a long-lasting
tradition of charitable giving. For more information about resources that can assist you in
starting your foundation, please contact the staff at the Association of Small Foundations, at
either [email protected] or 202-580-6560.
16
© 2006, Association of Small Foundations. All rights reserved. www.smallfoundations.org .
ASSOCIATION OF
SMALL FOUNDATIONS
for Jo- undations with few or no staff
Primer Series
Very clear.
Very comprehensive.
Very concise.
Your time is extremely valuable. Let ASF research, sift, and summarize the best information
for you.
The ASF Primer Series gives you key information on key topics - in just a few pages. ASF
Primers help you to plan, brainstorm, and set up efficient operations. You'll come away with
good questions for your board, staff, and advisors - saving you time and money.
For the most recent list of titles
in the ASF Primer Series
visit the ASF Bookstore at
www.smallfoundations.orq
The Association of Small Foundations (ASF) is a membership organization of over 3,000 foundations
with few or no staff. ASF enhances the power of small foundation giving by providing the
donors, trustees, and staff of member foundations with peer learning opportunities,
targeted tools and resources, and a collective voice in and beyond the philanthropic community.
Foundations with few or no staff represent half of all foundation giving in the United States.
ASSOCIATION OF
S SMALL FOUNDATIONS
for foundations with Pa' or no staff
1720 N Stmet, NW
Washington, District of Columbia 20036
Primer Series
Order Form
Name Organization Address Phone Email
Delivery (PLEASE CHOOSE ONE): q Mail+El Email
PDF
$1 S&H fee per primer on all mailed Primers
PRICING: ASF Member: $10 per Primer; Non-Member: $15 per Primer
QTY.
Total Price
n Awarding Grants to Individuals
n Basics of Proposal Review
n Bringing on the Board:
Practical Steps for Orienting Foundation Board Members
n Communicating with Grantees
n Connecting to Your Family's Foundation: A Primer for the Next Generation
n Creating a Strategy and Plan for Your Foundation's Investing ($20/S30)
n Disaster Grantmaking Strategies: Response & Prevention for Small
Foundations
n Effective Governance for Unstaffed Foundations
n Financial Reporting for Private Foundations
n Funding and Engaging in Advocacy
n How Technology Can Help You Mana ge Your Foundation
n How to Avoid Self-Dealing
FREE
n How to Start a Private Foundation (No Shipping Charge)
n International Grantmaking: Opportunities for Small Foundations
n Involving Children in Philanthropy
n Keeping Good Records
n Legal Essentials for Small Foundations
n Leveraging Your Assets with Loans
and Other Program Related Investments (PRIs)
n Making Plans for Succession: What Founders Need to Know
n Policymaking Made Clear:
Eleven Foundation Policies Your Board Should Consider
FREE
n Principles of Foundation Investment Management (No Shipping Charge)
n Protecting Your Small Foundation with Insurance
n Recruiting Foundation Trustees
n Setting Up a Small Foundation Office
n Trustee Compensation for Small Foundations
n Working with Community Foundations
Shipping and Handling Fee ($1 for each primer mailed)
TOTAL:$
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ORDER FORM SUBJECT TO CHANGE
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ASSOCIATION OF
SMALL FOUNDATIONS_
for finmhttiony 7: • ith or no sni
n -•
N Strcct, NW
Washington, District of Colninbia 20036
Primer Series Order Form
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Check (payable to ASF)
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State Zip Code Please fax both pages of this form to 202-580-6579; or mail your order to:
Association of Small Foundations
1720 N Street, NW
Washington, DC 20036
Please call 888-212-9922 (202-580-6560 in DC area) with any questions.
The Association of Small Foundations (ASF) is a membership organization glover 3,000 foundations
with few or no she: ASF enhances the power of small foundation giving by providing the
donors, trustees, and staff of member foundations with peer learning opportunities,
targeted tools and resources, and a collective voice in and beyond the philanthropic community.
Foundations with few or no staff represent half of all foundation giving in the United States.