When establishing a private foundation, you could either set it up as a trust or a nonprofit corporation. Having said that, together with the heightened concern more than legal liability plus the truth that directors and officers of nonprofit corporations may perhaps have some degree of protection from liability beneath state law, the corporate form is most regularly made use of. As discussed in Chapter five, for an organization to qualify for tax-exempt status as a charity, it requires to become organized for educational, scientific, religious, or other particular purposes.
Federal-level compliance
The initial step to set up a nonprofit corporation is usually to prepare its articles of incorporation or articles of organization. The IRS looks closely at these when you ask it to grant you tax-exempt status. The IRS suggests that your soon-tobe private operating foundation’s articles of organization include things like the following provisions:
- Distribute revenue each year: You will need to possess a clear statement that the foundation will distribute its earnings for every single of its tax years within a time and manner so as not to become topic to any tax on undistributed earnings.
- Stay clear of self-dealing: Include things like a directive that the foundation won't engage in any self-dealing (see the sidebar “Self-dealing is often a significant no-no” for extra facts on this practice).
- Distribute excess business enterprise holdings: Be certain to place within a requirement that the foundation won't retain any excess business enterprise holdings (no extra than 20 percent of an interest within a business enterprise enterprise).
- Only make permitted investments: Include things like a prohibition that the foundation won't make any investments that would jeopardize its charitable objective.
- Do not make taxable expenditures: Include things like a statement that the foundation won't make any taxable expenditures, which include spending money on prohibited political activities (by way of example, endorsing distinct candidates).
For those who pick out to establish a trust as an alternative to a nonprofit corporation for the foundation, the trust document requires to deliver for substantially related provisions for the ones shown inside the preceding bulleted list.
