Starting a Foundation

Does the Council on Foundations provide assistance with starting a foundation?

The Council on Foundations is a membership organization that supports grantmakers in various aspects of foundation management. We have basic information to help with understanding the general steps in starting a foundation. The Council does not provide legal or technical assistance services for starting a foundation. We have a helpful publication, Starting a Foundation: Formation and Consideration, detailing the laws governing foundations and everything you need to consider to start a foundation.

For more information and assistance with starting a foundation, here are a few recommended places to start:

The Nonprofit Resource Library

Hurwit & Associates' Nonprofit Law Resource Library contains information on a number of subjects pertaining to nonprofit law, including nonprofit start-up issues, state filing and compliance, governance and board questions, mergers and affiliations, nonprofit entrepreneurship, charitable contributions, and more.

National Council of Nonprofits

The National Council of Nonprofits is the network of state and regional nonprofit associations serving more than 20,000 member organizations. By linking local nonprofit organizations across the nation through state associations, the National Council helps small and midsize nonprofits manage and lead more effectively, collaborate and exchange solutions, engage in critical policy issues affecting the sector, and achieve greater impact in their communities.

The Foundation Center

The Foundation Center is a national nonprofit service organization recognized as the nation’s leading authority on organized philanthropy, connecting nonprofits and the grantmakers supporting them to tools they can use and information they can trust. Its audiences include grantseekers, grantmakers, researchers, policymakers, the media, and the general public.

Local Legal Counsel

Locate legal counsel in your area. Finding an attorney who is knowledgeable and experienced in the field of tax-exempt and charitable foundation law is critical to complying with and understanding the rules that apply to both private and public foundations. Here are a few places to check for legal assistance within your community:

  • State bar association
  • Local bar association
  • American Bar Association

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Can we join the Council before our foundation is formed?

The Council is a membership organization consisting primarily of grantmaking organizations, private operating foundations, and others supporting the field of philanthropy. While we welcome newly established organizations, we currently do not offer membership to organizations that have not yet formed under state and/or U.S. law, or the law of another country. We can, however, answer general questions and help connect you with resources to guide you through the start-up process.

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What are the general steps in starting a foundation?

The information provided here begins to answer the question of how to start a foundation. It is not a substitute for obtaining advice from knowledgeable legal counsel familiar with the rules in your state who can walk you through the steps and critical decisions in establishing a foundation.

There are three general stages in forming a foundation:

At the incorporation stage and the tax exemption application stage, the new foundation must comply with legal requirements on the state and federal level. More information on forming a nonprofit on the state level may be obtained by visiting your state government’s website.

Stage 1: Preformation Planning

The focus at this stage is on what the foundation hopes to accomplish—its purpose and goals—and on building the initial core of support. Before you begin the formation process, there are several questions you should consider that will help you decide which type of foundation would best suit the needs of the new organization.

  • Why are we forming this organization?
  • Who will do the work?
  • Who will donate the foundation start-up capital?
  • How will the foundation sustain itself?
  • Who will serve on the board of directors and who will be the officers?
  • How much administration and management do you wish to take on yourself? How much do you want to delegate?
  • What degree of control do you want over the funds?
  • What are the tax consequences?

Answering questions such as the ones listed above can help you and your advisers determine which type of charitable organization or giving vehicle is right for you.

Stage 2: Formation

When starting a foundation, it is essential for the donor or the donor's advisor to comprehend—at the outset—the basic legal rules that govern the formation and regulate the activities of foundations. This process is completed under state law, and the requirements vary from state to state. First, you must choose what legal form your foundation will take. Your options are generally either a trust or corporation. It should be emphasized that whatever form one chooses, it will be specifically regulated by state law, not federal law.

Each state has its own set of statutes that set out the rules for forming and running both a trust and a not-for-profit corporation. When forming any organization, you and your advisors should also research other local filing requirements, such as charitable solicitation, local business registration, sales tax exemption, and state income tax exemption. For more information about additional filing requirements, visit the website of your state and/or local government.

To learn more about various filing requirements for private foundations, see the Tax Filing, Audits, and Public Disclosure Requirements of this website.

Stage 3: IRS Recognition

Once the organization is formed under state law, the next step is typically for the organization’s leaders to seek recognition from the IRS as a tax-exempt charity. Such recognition means that the organization will not have to pay federal tax on its income and the organization will be eligible to receive tax-deductible contributions. For most organizations, this process involves submitting IRS Form 1023, "Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code." This form can be found on the IRS website at Once the IRS receives your Form 1023, it will determine: (1) whether your organization should be a Section 501(c)(3) organization, (2) whether it considers the organization to be a private foundation or public charity, and (3) if it qualifies as a public charity, what legal form of public charity your organization will be.

There are a wide variety of tax-exempt organizations that are not charitable, and therefore are not 501(c)(3) organizations. For a complete list, visit the IRS website at

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Should we set up our foundation as a trust or a corporation?

A trust is less formal in both its formation and operation. In most states, there are fewer requirements for trusts regarding regular meetings, minutes, state filings, officers, or other record keeping. However, amending the charitable trust instrument may be difficult, possibly requiring court approval or notice to the attorney general. On the other hand, a corporation can provide more flexibility and is usually adaptable to most foundation purposes. In addition, forming a nonprofit corporation often provides greater protection from personal liability for the directors. The corporate approach is more formal, requiring articles of incorporation, bylaws, regular meetings, minutes, state filings, and other reporting requirements. Corporate bylaws can be drafted to facilitate amendments for any necessary changes.

Recommended publication: Starting a Foundation: Formation and Considerations

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What are the costs of starting a foundation?

Prospective donors often wonder if they have enough money to start a private foundation. While the amount of assets available to endow the foundation is important, it is by no means the sole, or even the most important, factor in your decision. For this reason, the Council does not recommend a monetary threshold for forming a private foundation.

Determining whether a private foundation is right for you involves a host of additional questions, such as:

  • What values do you plan to express through your giving?
  • Do you wish to involve others (your family, your employees) and to what extent?
  • What is the geographic scope of your philanthropy?
  • How long do you want your philanthropy to operate? Years? Decades? Forever?
  • Do you prefer supporting others' work or hands-on participation?
  • To what degree are you comfortable delegating tasks (such as investment management or correspondence)?
  • How much time do you have to devote to administering your philanthropy?
  • What are the tax consequences?

The decision is one you'll want to make only after doing some research and getting some sound advice from a trusted philanthropic advisor.

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What are the options for administering a private foundation?

You will know the assets you can afford to put into a private foundation when starting it, but what will the annual administrative expenses be? That will depend on how you choose to administer your private foundation. There are many options for managing private foundations. Some of them include management by:

  • volunteer board of directors
  • paid staff
  • consultant
  • attorney
  • bank trust department
  • community foundation

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Can we afford to hire staff?

The Council on Foundations has developed three basic examples to help you decide whether you can afford paid staff. The scenarios below roughly demonstrate the relationship between asset amounts, grant distribution, and staffing expenses.

  • You make grants and do not provide direct charitable services.
  • You want a permanent endowment.
  • Your charitable budget is going to be in the range of 5 to 6 percent of assets
    • The IRS mandated minimum annual charitable expenditure is 5 percent of assets. This includes grants and administrative expenses, but does not include investment management expenses.
    • In the formulas below, we use the median foundation expenditure percentage of 5.5 percent for your charitable budget.
  • No more than 15 percent of your annual charitable budget will be used for administrative expenses.
    • Research by the Council on Foundations shows that the median charitable administrative expense level in relation to the total charitable budget for all private foundations is 8.6 percent. However, smaller foundations don't have the same economies of scale as larger foundations. Therefore, for smaller foundations we suggest that you assume that administrative expenses will be about 15 percent of your annual charitable budget.
  • Annual legal and accounting fees will total $5,000.

Depending upon the assets you have available, you may want to think about alternatives that can help you maximize your charitable dollars and choices for giving (see the "Additional Options" section below).

Example 1: $1 Million Foundation (No Staff)

Because of the small amount of money that should be devoted to administrative expenses (usually no more than 15 percent of your annual charitable budget), the option of hiring part-time staff is not financially prudent with a foundation of this size.

Total Annual Charitable Budget

$1,000,000 x .055 = $55,000 Assets x 5.5 percent = total annual charitable budget (grants + expenses)

Administrative Costs $55,000 x .15 = $8,250 Total annual charitable budget x 15 percent = administrative budget Without paid staff, your administrative costs will reflect only your legal and accounting fees (estimated at $5,000), which in this case is 9 percent of your annual charitable budget.

Volunteer Responsibilities

Because in this scenario the foundation cannot realistically afford staff, it will be the responsibility of the donor and volunteer board to review all grant requests; go on site visits as necessary; and handle all grantee correspondence, grantmaking investigations, and governance responsibilities of the foundation. If your grantmaking is focused and the grants are few in number, these responsibilities will be easier for you. These responsibilities can be extremely fulfilling when willingly undertaken. In preliminary responses to the Council's 2002 Foundation Management Survey, 93 percent of family foundation respondents reported that they feel inspired by their philanthropy.

Example 2: $5 Million Foundation (Half-time CEO)

Council on Foundations research shows that the majority of private foundations with assets of $5 million to $9.9 million have part-time staff only. The following calculations assume that your half-time CEO salary and benefits are $38,7501 and your annual legal and accounting fees are $5,000:

Total Annual Charitable Budget

$5,000,000 x .055 = $275,000 Assets x 5.5 percent = total annual charitable budget (grants + expenses)

Administrative Costs

$275,000 x .15 = $41,250 Total annual charitable budget x 15 percent = administrative budget

In this case, because your total charitable budget is significantly larger than the previous example, you might consider the option of a half-time staff person. With your half-time CEO salary and benefits at $38,750 and your legal and accounting costs at approximately $5,000, administrative costs total $43,750, which exceeds the recommended 15 percent administrative ceiling. Therefore, you might consider hiring a lower-compensated staff person such as a program officer or administrative assistant, with the board retaining many responsibilities, or hiring a CEO with legal or accounting skills so that the $5,000 fee is reduced.

Example 3: $10 Million Foundation (Half-Time CEO and Half-Time Administrative Assistant)

In this case, your annual charitable budget is an amount that realistically allows you to consider the option of hiring a half-time CEO and a half-time administrative assistant. Assuming that your half-time CEO and half-time administrative assistant salary/benefits are $68,7502 and your annual legal and accounting fees are $5,000:

Total Annual Charitable Budget

$10,000,000 x .055 = $550,000 Assets x 5.5 percent = total annual charitable budget (grants + expenses)

Administrative Costs

$550,000 x .15 = $82,500 Total annual charitable budget x 15 percent = administrative budget

Adding personnel and legal and accounting costs gives you a total of $73,750 for administrative costs. In this example, your administrative costs will be 13.4 percent of your annual charitable budget, which is below the 15 percent recommended ceiling.

As noted above, there are many options available to manage a private foundation. Our research indicates that many families opt for more than one philanthropic tool, each fulfilling a different goal. For example, in preliminary data from the 2002 Foundation Management Survey, 11 percent of the family foundations responding also had donor-advised funds at community foundations.

The costs related to starting a foundation on the state level will vary from one state to the next and depend on the type of structure (e.g., trust or corporation, public charity, or private foundation) chosen for the foundation. State fees are paid with submission of required documents to the state office that is responsible for regulating charities; usually, this is the secretary of state or the attorney general’s office. In addition, there are fees associated with seeking recognition of charity status with the IRS. Finally, there may be licensing or other fees required for operation of any business in a particular area.

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What are some alternatives to starting a private foundation?

Donor-Advised Funds

Donor-advised funds make philanthropy administratively simpler if one of your goals is to lessen your day-to-day obligations. In a donor-advised fund, donors make an irrevocable contribution to a fund, claim a charitable deduction on their income tax returns, and then recommend how the money in the fund should be distributed to charity. Public charities (e.g., community foundations) take the responsibility of managing such funds. Most accept gifts of cash, publicly traded stock, real estate, and other assets like closely held stock and life insurance. The donated funds are invested in the financial market, so they can keep growing. You can take the tax deduction—typically up to 50 percent of your adjusted gross income for cash gifts and 30 percent for appreciated properties such as stock—for the tax year in which the donation was made.

One advantage of creating a fund through a community foundation is that community foundation staff know and live in the community they serve and can work closely with you to fulfill your charitable goals. To find a community foundation in your area, visit the Council's Community Foundation locator.

Supporting Organizations

A supporting organization (SO) is a tax-exempt entity that supports a public charity. SOs must meet one of three complex legal tests that assure, at a minimum, that the charity being supported has some influence over the actions of the SO. The use of this form is common in connection with community foundations. While SOs are distinguishable from donor-advised funds because they are distinct legal entities, they share many of the same favorable deduction limitations.

Planned Gifts

Individual donors may explore various planned giving options, such as bequests, charitable remainder trusts, charitable lead trusts, pooled income funds, and charitable gift annuities. These usually involve a split income arrangement where the donor receives an income stream during his or her lifetime and the charity receives an outright gift after a term of years or upon the donor's death. You can make these planned gifts through community foundations and other charities.

Writing Checks

You also may decide to simply continue making direct donations. If you are contemplating increasing the size of your gifts, development (fundraising) professionals at your favorite nonprofits will be happy to work with you to honor any specific wishes you may have.

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Who regulates foundations?

Foundations are regulated by both federal and state entities. On the federal level, the IRS regulates the operations of both private foundations and public charities. In most states, the attorney general is empowered to supervise and regulate charities and foundations. The Council on Foundations does not regulate foundations. The Council is a membership organization that supports grantmakers in various aspects of foundation management.

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How does an organization apply to become a public charity or private foundation?

In order to be recognized by the IRS as a public charity, an organization must first be formed under state law, usually in the state where the organization is planning to do business. Once the organization is established under state law, it may seek to become a public charity by filing an IRS Form 1023 application. The IRS then will issue the applicant a determination letter that will state whether the IRS officially recognizes the organization as exempt under Section 501(c)(3) of the Internal Revenue Code. If a favorable determination has been made, the letter will indicate if the organization is considered a private foundation under 509(a), or a public charity under Section 509(a)(1), Section 509(a)(2), or Section 509(a)(3) of the Internal Revenue Code. For complete information on IRS requirements, visit the IRS’s website at, and review IRS Publication 526.

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Starting & Ending Foundations