So, You Want to Start a Foundation? Great!

For some business owners, the American dream is more than the freedom to achieve prosperity. To these entrepreneurs, it is the ability to have a real impact on individuals in meaningful ways. Often, they accomplish these goals by starting some kind of 501(c)(3) nonprofit, tax-exempt charitable organization.

SEE ALSO: Choosing Between a Private Foundation vs. Donor-Advised Fund

That’s what “Karl” wants to do:

“I am a Swedish-American from the small ‘Swedish’ town of Kingsburg, Calif. I am now living in a large Midwestern city, where I met and married my lovely wife, who is from the south of France.

“We want to create an educational foundation offering travel/study scholarships for high school students with Swedish ancestry who are taking French classes. They would travel to Sweden over the summer, spending a month, then, on to France, studying at a language immersion school and living with families.

“French high school students would be invited to the U.S. over the Christmas holidays where they would stay in American homes, and, of course, speak only English.

“We would finance this and ask for contributions from groups or schools in France and Sweden.

“Our accountant says that all we need to do to get started is to create a nonprofit corporation and can solicit tax-deductible donations immediately. What is involved in setting up a foundation? Do you feel our idea is feasible?”

What Kind of ‘Foundation’?

We ran Karl’s question by attorney Jeffrey Haskell, Chief Legal Officer at Foundation Source, based in Fairfield, Conn. It is the nation’s largest provider of support services for private foundations.

“In states where fundraisers are required to register before soliciting the public at large, a charitable organization that fails to do so may face stiff penalties and incur severe reputational damage that can be difficult to repair,” Haskell explains. “Indeed, some states publish public lists of organizations that are delinquent.”

“Your reader says he wants a ‘foundation,’ but he needs to decide if he wants to set up a private foundation or a public charity. Although both private foundations and public charities might have the word ‘foundation’ in their name, and both are classified as tax-exempt, 501(c)(3) organizations by the IRS, they have a major difference: the source of their funding.

“Whereas a public charity, like the Make-A-Wish Foundation, gets its funding from the general public, a private foundation, like the Bill & Melinda Gates Foundation, derives almost all of its support from an individual, family or corporation,” he explained.

Not a Piece of Cake

Having charitable ideas and goals are one thing, but fundraising — finding the money to turn the couple’s wish into reality — is something quite different, as I learned.

“If they establish this organization as a public charity, they would need to register in every state where funds are actively solicited,” Haskell points out. “The couple would also need to constantly be fundraising to maintain their status as a public charity.”

As far as online solicitations go, to help give nonprofits a clearer set of guidelines, the National Association of State Charity Officials (NASCO) released the Charleston Principles in 2001. Under the principles, registration for online solicitation typically is required when a charity is domiciled or has a physical presence in a state requiring it. Even when a charity is neither domiciled nor physically present in a state, these principles require registration when the organization solicits donations through its website and (a) specifically targets residents within that state, such as through an email campaign, or (b) passively receives contributions from that state on a repeated or substantial basis.

As you can see, fundraising — and all the recordkeeping required — is a lot of work, so Haskell suggests that establishing a private foundation might be a better alternative.

“If they are personally able to provide most of the funding, a private foundation would be an ideal choice because it would eliminate the fundraising hassles while enabling them to be hands-on and to make decisions about who receives the awards.”

See Also: Should I Change Lawyers?

Suggestions for Pursuing Either Option

While the many considerations around establishing a private foundation or public charity are beyond the scope of today’s story, Haskell provides some important guidance for those who want to establish either one:

• Perform a needs analysis. Is there a need for what you want to do, or is it already being addressed by another organization? If so, can you partner with them?
• If you decide that it is a “go,” retain a lawyer who specializes in charities and nonprofits or a firm that establishes and manages private foundations. Because tax-exempt organizations are subject to strict regulations, it takes knowledge and careful oversight to remain in compliance.
• Carefully define your charitable purpose. Whether to help focus your own grant-making or to explain your organization’s mission to potential donors, you’ll need a clear mission statement.
• File for 501(c)(3) Tax-Exempt Status with the IRS.
• Draft a business plan that details how your organization will function.
• Recruit the most qualified people you know for your board of directors.

“Both private foundations and public charities have enormous social and economic impact. Understanding the operational requirements, compliance considerations and philanthropic capabilities of each can help individuals choose the right type of organization for their needs and abilities,” he concludes.

Do Not Expect Donations from France or Sweden

Although your venture has direct connections to France and Sweden, don’t expect a lot of donations from either country, considering where they rank on the World Giving Index, which evaluates worldwide charitable giving.

Indonesia was first; the U.S. came in as fourth.

Sweden earned 42nd place. France — 72nd place.

See Also: What Type of Giver Are You? To Do the Most Good, Find Your Giving Personality

After attending Loyola University School of Law, H. Dennis Beaver joined California's Kern County District Attorney's Office, where he established a Consumer Fraud section. He is in the general practice of law and writes a syndicated newspaper column, "You and the Law." Through his column he offers readers in need of down-to-earth advice his help free of charge.

Comments are suppressed in compliance with industry guidelines. Click here to learn more and read more articles from the author.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.