How to Set Up a Foundation in the US: Incorporation and 501(c)(3)

To set up a foundation in the US, you incorporate a nonprofit entity under your state’s laws, obtain a federal Employer Identification Number, and then apply separately to the IRS for tax-exempt status under Section 501(c)(3). Plan on several months from incorporation to an IRS determination letter, and expect ongoing federal and state compliance to begin the moment the foundation legally exists.

First, Confirm You’re Forming a Private Foundation

The IRS presumes every 501(c)(3) organization is a private foundation unless it notifies the IRS otherwise and proves it qualifies as a public charity.¹ That default matters, because the two structures operate under very different rules.

A private foundation is usually funded by a single individual, family, or corporation. The founder keeps significant control over investments and grantmaking. The trade-off is a stricter tax regime: an excise tax on investment income, a mandatory minimum annual payout, and tight restrictions on transactions with insiders.

A public charity draws a substantial share of its support from the general public or government sources. Because public oversight is built into the funding model, operating restrictions are lighter. If you plan to fund the entity primarily with your own or your family’s wealth, you’re almost certainly forming a private foundation. If you plan to fundraise broadly, the public charity structure may fit better. The steps below assume the private foundation path.

Step 1: Incorporate as a Nonprofit in Your State

A foundation must be legally formed under state law, usually as a nonprofit corporation, before it can apply for federal tax-exempt status. You do that by filing Articles of Incorporation with your state’s Secretary of State or equivalent agency.

What the Articles Must Include

The articles need a unique name that’s distinguishable from other entities registered in the state. Many states require a corporate designator such as “Corporation” or “Incorporated.” You’ll also need a registered agent: a person or company with a physical street address in the state (a P.O. box won’t work) who can accept legal documents for the foundation. List the initial directors or trustees who will govern the organization.

The most consequential language, from a federal tax standpoint, is the purpose clause and the dissolution clause. The IRS publishes suggested wording for both. The purpose clause should state that the foundation is organized exclusively for charitable, religious, educational, or scientific purposes, including making distributions to other 501(c)(3) organizations. The dissolution clause must specify that if the foundation ever winds down, its remaining assets go to another tax-exempt organization or to a government entity for a public purpose.² If your articles lack this language, the IRS will reject or delay your tax-exemption application.

Filing and Fees

Articles can typically be filed online, by mail, or in person. Filing fees vary by state but generally fall in the range of $25 to $75 for a nonprofit. Some states offer reduced fees for organizations that certify their annual revenue is below a certain threshold. Once the state accepts your filing, you’ll receive a Certificate of Incorporation or similar document confirming the foundation legally exists.

Step 2: Adopt Bylaws and Hold the Organizational Meeting

Articles create the foundation. Bylaws tell it how to run. Bylaws usually aren’t filed with the state, but the IRS requires a copy with your tax-exemption application.

Bylaws should address the structure and size of the board, how directors are elected and removed, term lengths, meeting frequency, quorum for votes, and the roles of officers (at minimum a president, secretary, and treasurer). They should also set the fiscal year, spell out how the bylaws themselves can be amended, and include a conflict of interest policy.

The Conflict of Interest Policy

The IRS pays attention to this one. Form 1023 asks specifically whether the foundation has adopted a conflict of interest policy, and the IRS publishes a sample version in the form’s instructions. The policy requires any director or officer with a financial interest in a transaction to disclose it, leave the room during deliberation and voting, and let the remaining board members decide whether the transaction is fair and in the foundation’s best interest. Each director and officer should sign an annual statement confirming they’ve read and agreed to the policy.

The First Board Meeting

After incorporation, the board holds an organizational meeting to adopt the bylaws, elect officers, authorize the EIN application and the tax-exemption filing, and handle startup business like opening a bank account. Keep written minutes of this meeting and every meeting afterward. The annual Form 990 asks whether the organization documents its board meetings, and the answer needs to be yes.

Step 3: Get an Employer Identification Number

Before applying for tax-exempt status, the foundation needs an EIN from the IRS. This is the organization’s federal tax ID. The fastest route is the online application on the IRS website, which issues the EIN immediately. You can also apply by fax or mail using Form SS-4.³

One timing detail matters: don’t apply for an EIN until the foundation is legally incorporated. The IRS treats the EIN application as confirmation the organization exists, and it starts the clock on the three-year filing window that can trigger automatic revocation of tax-exempt status if annual returns aren’t filed.³

Step 4: Apply for 501(c)(3) Recognition

State incorporation makes the foundation a legal entity. It does not make it tax-exempt. That requires a separate application to the IRS, filed on Form 1023 or the shorter Form 1023-EZ.

Which Form Applies

Most private foundations must use the full Form 1023. Form 1023-EZ is available only to organizations that project annual gross receipts of $50,000 or less in each of the next three years and hold total assets of $250,000 or less.⁴ Even at that size, several categories of organizations are ineligible for the short form. The instructions include an eligibility worksheet that must be completed before filing.

Form 1023 is substantial. It asks for a detailed narrative of the mission and planned activities, financial projections, information about officer and director compensation, a copy of the certified Articles of Incorporation, the bylaws, and the conflict of interest policy. Both forms must be filed electronically through Pay.gov.⁴

Fees and Processing Time

The IRS user fee is $600 for Form 1023 and $275 for Form 1023-EZ. Amounts are set by the IRS and can change, so check the current fee before filing. As of early 2026, the IRS reports that 80% of Form 1023 applications receive a determination within 191 days.⁵ Form 1023-EZ applications are generally processed faster.

The 27-Month Window

There’s a real reason to move quickly. If you file within 27 months of the end of the month in which the foundation was incorporated, and the IRS approves the application, tax-exempt status is retroactive to the date the foundation was legally formed. Miss that window and the exemption only takes effect on the date the IRS received your application, meaning donations received in the gap period may not be deductible to donors.⁴

Step 5: Register in Every State Where You Solicit Donations

The IRS determination letter isn’t the last step. Most states require charitable organizations to register with a state agency before soliciting donations from residents. Registration is separate from incorporation and is typically overseen by the state Attorney General’s office or a division of the Secretary of State.

The application usually calls for the IRS determination letter, articles of incorporation, and bylaws, along with a state form and a filing fee that varies by jurisdiction and sometimes by the organization’s revenue. If the foundation solicits in multiple states, it must register in each. Some states accept the Unified Registration Statement, though its utility has diminished as most states now require online filing through their own portals. Registration must be renewed annually in each state, typically with the most recent Form 990-PF attached. Missing a registration or renewal can trigger financial penalties and, in some states, a court order barring further fundraising until the foundation comes into compliance.

Federal recognition also doesn’t automatically exempt the foundation from state or local taxes. Most states accept the federal determination as the basis for exemption from state income tax, but exemptions from sales tax, property tax, and other local taxes generally require separate applications. Check with your state’s department of revenue soon after your determination letter arrives.

What Changes Once You’re Operating

Private foundations live under a set of federal excise taxes designed to keep their assets aimed at charitable purposes. These rules take effect immediately, and they are the biggest ongoing difference between running a private foundation and running a public charity.

Excise Tax on Investment Income

Private foundations pay a flat 1.39% excise tax each year on net investment income, including interest, dividends, rents, royalties, and capital gains from the foundation’s investments.⁶ It’s not a large tax, but it’s one of the few any 501(c)(3) pays, and it must be reported and paid annually.

The 5% Payout Rule

A private non-operating foundation must distribute roughly 5% of the fair market value of its investment assets each year for charitable purposes, calculated on the prior year’s asset values. The requirement doesn’t apply in the founding year, but it kicks in for the first full tax year after that. An initial excise tax of 15% applies to any shortfall. If the shortfall isn’t corrected after the taxable period, an additional tax of 100% of the remaining undistributed amount applies.⁷

Self-Dealing

Federal law prohibits most financial transactions between a private foundation and its “disqualified persons,” a category that includes substantial contributors, officers and directors, their family members, and entities they control. Selling property to the foundation, borrowing from it, using its assets, or receiving compensation beyond what’s reasonable for actual services all count as self-dealing.⁸

Penalties escalate. An initial tax of 10% of the amount involved is imposed on the disqualified person for each year the self-dealing goes uncorrected. Foundation managers who knowingly participate face a 5% tax, capped at $20,000 per act. If the transaction isn’t corrected within the allowed period, the disqualified person owes an additional tax of 200% of the amount involved, and a non-cooperating manager can owe 50%, also capped at $20,000.⁹

Foundations are also barred from participating in political campaigns and face strict limits on lobbying and other legislative activity.¹⁰

The Annual Form 990-PF

Every private foundation must file Form 990-PF with the IRS each year, regardless of income. The return reports finances, calculates the excise tax on investment income, and documents charitable distributions. It’s due by the 15th day of the fifth month after the close of the foundation’s tax year, which for a calendar-year foundation is May 15.¹¹

Missing three consecutive annual returns causes automatic loss of tax-exempt status, effective on the due date of the third missed return. Reinstatement requires a new application and another user fee.¹² This is one of the most common ways small foundations lose their status, and it’s entirely preventable.

Form 990-PF is also public. Anyone can request a copy, and the foundation must make its annual returns and its original exemption application available for inspection. Most foundations post the documents on their website or rely on a service that hosts nonprofit filings.

1
Office of the Law Revision Counsel. 26 U.S. Code 508 – Special Rules With Respect to Section 501(c)(3) Organizations
2
Internal Revenue Service. Suggested Language for Corporations and Associations (Per Publication 557)
3
Internal Revenue Service. Obtaining an Employer Identification Number for an Exempt Organization
4
Internal Revenue Service. Instructions for Form 1023-EZ
5
Internal Revenue Service. Where’s My Application for Tax-Exempt Status?
6
Internal Revenue Service. Tax on Net Investment Income
7
eCFR. 26 CFR 53.4942(a)-1 – Taxes for Failure to Distribute Income
8
Internal Revenue Service. Self-Dealing by Private Foundations: Use of Foundations Income or Assets
9
Office of the Law Revision Counsel. 26 U.S. Code 4941 – Taxes on Self-Dealing
10
Office of the Law Revision Counsel. 26 U.S. Code 501 – Exemption From Tax on Corporations, Certain Trusts, Etc.
11
Internal Revenue Service. Instructions for Form 990-PF (2025)
12
Internal Revenue Service. Automatic Revocation of Exemption