Setting up a private foundation takes six to twelve months and moves through two tracks: forming a legal entity under state law, then getting the IRS to recognize it as a tax-exempt organization under Section 501(c)(3). Here is how to set up a private foundation from the first filing to the determination letter, and what the foundation will owe in ongoing compliance once it is running.
Pick a Legal Structure
The first decision is whether to organize as a nonprofit corporation or a charitable trust. A nonprofit corporation has a board of directors, officers, articles of incorporation, and bylaws. A charitable trust runs on a trust agreement and one or more trustees.
Corporations are far more common. They give board members limited liability protection and a more flexible governance structure. Trusts can be simpler to create, but changing the terms later often requires court approval, so you lose flexibility in exchange for that early simplicity.
The structure also shapes your state filing. Corporations file articles of incorporation with the Secretary of State. Trusts may only need an executed, notarized trust document, though some states require separate registration. Either way, you need a registered agent in your state of formation to accept legal documents for the foundation.
Draft Governing Documents the IRS Will Accept
Your articles of incorporation (or trust agreement) and bylaws are what the IRS scrutinizes when you apply for tax-exempt status. Missing provisions are the most common reason applications get delayed or denied.
Required Provisions Under Section 508(e)
Federal law requires every private foundation’s governing document to include language that commits the foundation to distribute income in a way that avoids the undistributed-income penalty, prohibits self-dealing, prevents excess business holdings, bars investments that jeopardize the charitable mission, and prohibits taxable expenditures like lobbying or electioneering.1Office of the Law Revision Counsel. 26 U.S. Code 508 – Special Rules With Respect to Section 501(c)(3) Organizations Without these, the IRS will not grant tax-exempt status.
You also need a dissolution clause stating that if the foundation ever shuts down, its remaining assets go to another 501(c)(3) or to a government entity for a public purpose.2Internal Revenue Service. Does the Organizing Document Contain the Dissolution Provision Required Under Section 501(c)(3) This keeps foundation assets from reverting to the founder or their family on dissolution.
Bylaws and Conflict-of-Interest Policy
Bylaws are your operating manual: how many board members you have, how they are appointed or replaced, how often the board meets, what constitutes a quorum, and how votes work on grants and investments. A conflict-of-interest policy is a practical necessity. The IRS asks for one during the application and it describes how the foundation prevents board members from profiting personally from their positions.
Identify your initial board members in the organizational documents. The IRS will want names, addresses, and any family or business relationships among them, because those relationships determine who counts as a “disqualified person” under the self-dealing rules.
File With the State
If you are forming a nonprofit corporation, submit your articles of incorporation to the Secretary of State. Most states offer online filing; some still accept paper. Filing fees usually run $50 to $300. Approval can take a few business days or several weeks depending on the state. Once approved, you receive a certificate of incorporation or a stamped copy of your articles, which is the moment the foundation legally exists.
Many states also require charitable organizations to register separately with the Attorney General’s office, either before soliciting donations or as a condition of holding charitable assets. Requirements vary. Check with your state AG’s charitable trust division early. Missing this step can bring fines or block you from operating in that state.
Get an Employer Identification Number
Before you can open a bank account or file for tax exemption, you need an EIN. You can apply online through the IRS at no cost and receive it immediately.3Internal Revenue Service. Get an Employer Identification Number The online application runs during limited hours. Fax or mail using Form SS-4 also works but takes longer.4Internal Revenue Service. Instructions for Form SS-4
File Form 1023 With the IRS
This is the step that takes the most preparation and the most patience. You are asking the IRS to recognize the foundation as tax-exempt under Section 501(c)(3), which also automatically classifies it as a private foundation under Section 509 unless you can show otherwise.5Office of the Law Revision Counsel. 26 USC 509 – Private Foundation Defined
What Form 1023 Asks For
Most private foundations file the full Form 1023.6Internal Revenue Service. About Form 1023, Application for Recognition of Exemption The application asks for detailed financial data, and how much depends on how long the entity has existed.7Internal Revenue Service. Instructions for Form 1023 (12/2024) You also need a narrative describing your planned activities and how they qualify as charitable, plus disclosure of every disqualified person: substantial contributors, foundation managers, and their family members. Those are the people subject to excise taxes if they engage in self-dealing.8Office of the Law Revision Counsel. 26 USC 4941 – Taxes on Self-Dealing
A shorter Form 1023-EZ exists for organizations with projected annual gross receipts under $50,000 and total assets under $250,000.9Internal Revenue Service. About Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) Most private foundations exceed the asset limit because they are funded by an initial endowment, so the full 1023 is the common path.
Submitting, Paying, and Waiting
Form 1023 is submitted electronically through Pay.gov. You upload the completed form and all required attachments (signed bylaws, state-approved articles, supplemental responses) as a single PDF no larger than 15 megabytes.10Pay.gov. Application for Recognition of Exemption Under Section 501(c)(3) The user fee is $600, paid at submission, nonrefundable whether or not the IRS approves you.11Internal Revenue Service. Form 1023 and 1023-EZ: Amount of User Fee
As of late 2025, the IRS reports that 80 percent of Form 1023 determinations are issued within 191 days, roughly six and a half months.12Internal Revenue Service. Where’s My Application for Tax-Exempt Status? An IRS agent may contact you during review to ask about your planned activities or financial projections. Respond promptly. Expedited review exists but requires a compelling reason.
Hold the First Board Meeting
Once state incorporation is confirmed and the EIN is in hand, convene the board for a formal organizational meeting. The board adopts the bylaws, elects officers, and authorizes opening a bank account in the foundation’s name. That account must be entirely separate from any personal accounts. Commingling funds is one of the fastest ways to jeopardize both your tax-exempt status and the liability protection of the corporate form.
Record the initial endowment in the minutes. Cash, securities, or other property, documenting it creates the official record of the foundation’s first charitable assets. From there, the foundation can begin grant-making or direct charitable activities.
The Rules You Will Live Under
Private foundations face restrictions that do not apply to public charities. Violating any of them triggers excise taxes on the foundation and, in many cases, on individual board members personally. Understanding these rules before you launch matters more than most founders realize, because they shape everything from who you can hire to what you can invest in.
Self-Dealing
The most common trap for family foundations. A disqualified person (the founder, substantial contributors, their family, and foundation managers) generally cannot engage in financial transactions with the foundation. That includes selling or leasing property to it, borrowing from it, receiving unreasonable compensation, or using its assets for personal benefit. The initial penalty is 10 percent of the amount involved for each year the transaction goes uncorrected, paid by the person who engaged in the deal. Foundation managers who knowingly participate face a separate 5 percent tax.8Office of the Law Revision Counsel. 26 USC 4941 – Taxes on Self-Dealing
One exception matters: the foundation can pay reasonable compensation to disqualified persons for services genuinely necessary to carry out its mission. A family member serving as executive director or an investment advisor managing the endowment can be paid, but the compensation must be reasonable relative to the services.13Internal Revenue Service. Paying Compensation – Private Foundations
The 5 Percent Minimum Distribution
Every private foundation must distribute at least 5 percent of the fair market value of its non-charitable-use assets each year for charitable purposes.14Office of the Law Revision Counsel. 26 U.S. Code 4942 – Taxes on Failure to Distribute Income The calculation uses the average value of those assets from the prior year, minus any acquisition debt. Qualifying grants, direct charitable program expenses, and reasonable administrative costs tied to charitable activities all count toward the 5 percent. Miss it and the shortfall gets hit with a 30 percent excise tax each year it goes uncorrected, rising to 100 percent if the foundation does not make up the difference within 90 days of IRS notification.15Internal Revenue Service. Taxes on Failure to Distribute Income – Private Foundations
This drives your investment strategy. The endowment needs to generate enough return to cover the 5 percent payout plus inflation and management fees. Most advisors recommend targeting a total return of at least 7 to 8 percent annually to sustain purchasing power over time.
Excess Business Holdings
A private foundation and its disqualified persons together generally cannot own more than 20 percent of the voting stock in any business enterprise. That ceiling rises to 35 percent only if the foundation can show that someone other than a disqualified person has effective control. The foundation has no permitted holdings at all in a sole proprietorship.16eCFR. 26 CFR 53.4943-3 – Determination of Excess Business Holdings The same percentages apply to partnership profits interests. If you plan to fund the foundation with closely held business interests, map this out before the contribution.
Jeopardizing Investments
The foundation cannot invest in ways that jeopardize its ability to carry out its charitable purposes. There is no bright-line test. The IRS looks at whether the foundation exercised ordinary business care and prudence. Highly speculative or illiquid investments are the usual targets. The initial tax is 10 percent of the amount invested for each year it stays in jeopardy, applied to both the foundation and any manager who knowingly approved it. If not corrected within the correction period, an additional 25 percent tax hits the foundation.17Office of the Law Revision Counsel. 26 U.S. Code 4944 – Taxes on Investments Which Jeopardize Charitable Purpose
Taxable Expenditures
Certain kinds of spending trigger a 20 percent excise tax on the foundation plus a 5 percent tax on any manager who approved the expenditure knowing it was prohibited.18Office of the Law Revision Counsel. 26 U.S. Code 4945 – Taxes on Taxable Expenditures The prohibited categories:
- Lobbying to influence legislation, whether by direct contact with legislators or by shaping public opinion on pending bills.
- Electioneering or voter registration drives (with narrow exceptions).
- Grants to individuals, including scholarships and travel grants, unless the foundation has IRS-approved procedures for its grant-making process.
- Grants to organizations that are not public charities, unless the foundation exercises “expenditure responsibility” by tracking exactly how the funds are spent and reporting back to the IRS.
Annual Filings
Form 990-PF and the Investment Income Tax
Every private foundation must file Form 990-PF each year, regardless of size. The return is due by the 15th day of the fifth month after the close of the tax year, so May 15 for calendar-year foundations.19Internal Revenue Service. 2025 Instructions for Form 990-PF Filing late without reasonable cause brings a penalty of $20 per day for foundations with gross receipts under roughly $1.2 million, up to $12,000. Larger foundations face $120 per day up to $60,000.20Internal Revenue Service. Filing Procedures: Late Filing of Annual Returns The person responsible for filing can face personal penalties of $10 per day up to $6,500 for ignoring a written IRS demand. Miss three consecutive years and the foundation automatically loses its exempt status.
On top of the return, every private foundation owes a 1.39 percent excise tax on its net investment income each year under Section 4940.21Internal Revenue Service. Tax on Net Investment Income Net investment income includes interest, dividends, rents, royalties, and capital gains from the sale of assets. It is calculated and reported on Form 990-PF.
Public Disclosure
Private foundations must make their annual returns available for public inspection, and contributor identities are not shielded.22Internal Revenue Service. Public Disclosure and Availability of Exempt Organizations Returns and Applications: Requirements for Private Foundations Your Form 990-PF, the original exemption application, and any IRS determination letters must be available to anyone who asks. Treat every line of the return as public.
State Renewals
Most states require annual renewal of your charitable registration, often tied to a copy of the 990-PF filed with the Attorney General. Fees and deadlines vary. Letting a state registration lapse can restrict your ability to make grants to organizations in that state or accept contributions from donors there. Multi-state operation means multi-state renewals.
How Much It Takes to Make This Worthwhile
There is no legal minimum endowment to create a private foundation. You could technically start one with a few thousand dollars. The practical question is whether the assets justify the overhead. Between the $600 IRS application fee, legal fees for drafting documents (often $2,000 to $5,000 for straightforward setups), annual 990-PF preparation, investment management, and board compliance time, a foundation under $250,000 spends a disproportionate share of its resources on administration rather than charitable work. Most advisors suggest a private foundation makes financial sense starting around $1 million. Below that, a donor-advised fund typically delivers more charitable impact per dollar and skips most of the compliance burden described above.