To start a foundation and get tax-exempt status, you form a nonprofit corporation in your state, adopt governing documents and a board, obtain an Employer Identification Number, and then apply to the IRS for recognition under Section 501(c)(3). The process usually takes several months and costs at least a few hundred dollars in government filing fees, more if you use lawyers or accountants. Most foundations are structured as private foundations, which brings meaningful tax benefits but also a permanent set of operating restrictions you should understand before you file anything.
Decide What You’re Actually Building
Every 501(c)(3) organization is classified by default as a private foundation unless it qualifies as a public charity.1Internal Revenue Service. Exempt Organization Types That classification shapes the rest of the work, so settle it first.
A private foundation typically gets its money from one donor, one family, or one company, and makes grants to other charities rather than running programs itself. Because control sits with a small group, the IRS regulates these organizations more heavily: an excise tax on investment income, a mandatory annual payout, and strict prohibitions on transactions with insiders.1Internal Revenue Service. Exempt Organization Types
A public charity draws support from a broad donor base, the general public, or government sources. It must pass a public support test showing that roughly one-third of revenue comes from public sources over a rolling five-year window; new organizations get until their sixth year to demonstrate this.
The distinction also affects what donors can deduct. Cash gifts to a public charity are deductible up to 60 percent of adjusted gross income; cash gifts to a private foundation are capped at 30 percent.2Internal Revenue Service. Charitable Contribution Deductions For gifts of appreciated property, the split is 30 percent versus 20 percent, and many non-publicly-traded assets given to private foundations are valued at cost basis rather than fair market value.
If you plan to fund the organization from your own or your family’s wealth, you’re forming a private foundation. If you plan to raise from the public, structure it as a public charity from the start.
One alternative worth considering before you commit: a donor-advised fund. A DAF is an account at a sponsoring public charity where you contribute assets, take an immediate deduction at the higher public-charity limits, and recommend grants over time. There are no startup costs, no annual tax filings, no board meetings, and no minimum distribution. The trade-off is control. The sponsoring charity legally owns the assets, and you can only advise on grants. You can’t hire staff, run your own programs, or build an institution. For someone giving a few thousand dollars a year, a foundation is overkill. For someone committing millions to a multi-generational mission, the control is worth the compliance load.
Form the Nonprofit Corporation
The foundation legally exists once you incorporate it in a state. Everything else, including the IRS application, depends on this step.
Name and Registered Agent
Your name has to be distinguishable from existing entities on file in the state. Most states have a searchable online database. Depending on the state, the name may need to include a designator like “Corporation,” “Incorporated,” or “Foundation.”
You’ll also designate a registered agent: a person or authorized service with a physical street address (not a P.O. box) in the state of incorporation who can receive legal documents on the foundation’s behalf. This can be a founder, a director, or a commercial service.
Board of Directors
State law sets the minimum number of directors. Many states require at least three; some allow one. Each director’s full legal name and address goes into the incorporation paperwork and becomes public. Choose carefully. These people carry fiduciary duty for the foundation, and in a private foundation, their transactions with the organization are heavily restricted.
Articles of Incorporation and Bylaws
The articles must include a purpose statement limiting the foundation to activities that qualify under Section 501(c)(3): charitable, educational, religious, scientific, and similar purposes. Draft this narrowly enough to describe your actual mission but broadly enough that the work can evolve. A poorly written purpose clause is one of the most common reasons IRS applications get delayed.
Bylaws are separate and internal. They govern how meetings happen, how officers are elected, what constitutes a quorum, and how the bylaws themselves get amended. You don’t file them with the state, but the IRS asks for them during the exemption review. The IRS also asks whether you’ve adopted a conflict of interest policy; while not strictly required for exemption, the IRS instructions strongly recommend one, and its absence signals weak governance.3Internal Revenue Service. Instructions for Form 1023
File and Hold the First Meeting
You file the articles of incorporation (called a “certificate of incorporation” in some states) with the Secretary of State or equivalent office. Many states allow online filing. Fees generally run from $25 to $75, with expedited processing available for extra in some jurisdictions. Once processed, you’ll get a certificate or stamped articles back. Keep it. You’ll need it for the IRS application, bank accounts, and nearly everything after.
Then hold an organizational meeting of the board. Adopt the bylaws, elect officers (president, treasurer, secretary, and any others your bylaws call for), and formally acknowledge the articles. Record minutes. The IRS may ask for them, and you want a documented paper trail from day one.
Get an EIN
Before applying for exemption, get an Employer Identification Number. It’s the foundation’s tax ID. The fastest route is the IRS online application, which issues the number immediately. You can also apply by fax or mail using Form SS-4, but those take longer.4Internal Revenue Service. Get an Employer Identification Number
Apply for 501(c)(3) Recognition
Incorporating creates the legal entity. Federal recognition under Section 501(c)(3) is what makes contributions tax-deductible and exempts the foundation’s income from federal tax. Two separate steps, and neither substitutes for the other.
Form 1023 or Form 1023-EZ
The application comes in two versions. Form 1023-EZ is a streamlined version for organizations projecting gross receipts of $50,000 or less in each of the next three years and holding total assets of $250,000 or less.5Internal Revenue Service. Instructions for Form 1023-EZ The eligibility worksheet also disqualifies certain organizations outright, including churches, schools, hospitals, and entities formed under foreign law.
Most private foundations don’t qualify for the 1023-EZ because their funding sits well above the $250,000 threshold. If yours doesn’t qualify, you file the full Form 1023. It’s considerably more involved and requires a narrative description of all planned programs, a three-year projection of revenue and expenses, details about any compensation arrangements, and information about relationships with other organizations or insiders.
Both forms are submitted electronically through Pay.gov. The user fee is $275 for Form 1023-EZ and $600 for the full Form 1023, non-refundable regardless of outcome.3Internal Revenue Service. Instructions for Form 1023 Processing runs from a few weeks for the 1023-EZ to several months for the full form. Expect the reviewing agent to come back with follow-up questions.
The Determination Letter
If approved, the IRS issues a determination letter confirming your tax-exempt status. Donors will ask to see it before contributing. Banks and grantmakers will ask for it before opening accounts or funding you. Store it permanently and somewhere you can find it.
Charitable Solicitation Registration
Many states require a separate registration before you can legally solicit donations from residents. This is not the same as incorporation and not the same as IRS exemption. It’s typically handled by the state Attorney General’s office or a dedicated charities bureau. Requirements vary widely, and soliciting before registering can bring fines or a cease-and-desist order. If you’ll fundraise in multiple states, you’ll generally need to register in each one where you’re actively soliciting.
What Running a Private Foundation Looks Like
Getting the determination letter is the start of the ongoing work, not the end. Private foundations sit under a set of federal restrictions that don’t apply to public charities, and the penalties for tripping over them escalate quickly.
Excise Tax on Investment Income
Every private foundation pays a 1.39 percent excise tax on its net investment income each year: interest, dividends, rents, royalties, and capital gains, minus the ordinary expenses of earning that income.6Office of the Law Revision Counsel. 26 USC 4940 – Excise Tax Based on Investment Income It’s reported on Form 990-PF, with quarterly estimated payments required if the total exceeds $500.
The 5 Percent Payout
Private non-operating foundations must distribute at least 5 percent of the average fair market value of their investment assets each year in qualifying distributions. Grants to charities count. Reasonable administrative expenses tied to charitable work count. Direct program costs count. The excise tax paid on investment income counts. Investment management expenses do not. Fall short and the IRS imposes a 30 percent tax on the undistributed amount, with a follow-up 100 percent tax if the shortfall isn’t corrected.7Office of the Law Revision Counsel. 26 USC 4942 – Taxes on Failure to Distribute Income
This is where new foundation creators most often stumble. Endow a foundation with $1 million and you’re distributing about $50,000 every year, in strong markets and weak ones alike.
Self-Dealing
The tax code flatly prohibits most financial transactions between a private foundation and its “disqualified persons”: founders, substantial contributors, board members, officers, their family members, and entities they control. Selling or leasing property to or from the foundation, lending money, providing goods or services, and transferring foundation assets for a disqualified person’s benefit are all off the table.8Internal Revenue Service. Acts of Self-Dealing by Private Foundation Indirect self-dealing through a controlled entity counts too.
The penalties fall on the disqualified person personally, and foundation managers who knowingly approved the transaction can face separate penalties. Whether the deal was at fair market value or whether the foundation actually benefited is irrelevant. Self-dealing is a bright-line rule.
Excess Business Holdings and Jeopardizing Investments
A foundation and its disqualified persons together generally cannot own more than 20 percent of the voting stock of a business enterprise (35 percent if an unrelated party has effective control). Holdings of 2 percent or less are exempt.9Office of the Law Revision Counsel. 26 USC 4943 – Taxes on Excess Business Holdings Managers must also invest foundation assets with reasonable business care; investments that jeopardize the foundation’s charitable purpose trigger a 10 percent excise tax on the foundation and a separate 10 percent tax on any manager who knowingly participated, with larger penalties if the investment isn’t unwound.
Annual Filings and Losing Exemption
Every private foundation files Form 990-PF with the IRS annually, no matter how small and no matter whether it did anything that year. The return is due on the 15th day of the fifth month after the close of the foundation’s tax year (May 15 for a calendar-year foundation). Form 8868 filed before the deadline gets an automatic six-month extension with no explanation.
Public charities file different versions depending on size: Form 990-N (the electronic postcard) for organizations with gross receipts under $50,000; Form 990-EZ for those with receipts under $200,000 and assets under $500,000; the full Form 990 for larger organizations.
Late-filing penalties add up. Organizations with gross receipts under roughly $1.2 million face $20 per day up to $12,000. Larger organizations face $120 per day up to $60,000.10Internal Revenue Service. Exempt Organizations Annual Reporting Requirements – Filing Procedures: Late Filing of Annual Returns The bigger risk is automatic revocation: any exempt organization that fails to file for three consecutive years loses its tax-exempt status by operation of law, and getting reinstated means running the application again.11Internal Revenue Service. Automatic Revocation of Exemption
Tax-exempt organizations must also make their annual returns available to anyone who asks, for three years from the due date or actual filing date, whichever is later. Private foundations must also disclose the names and addresses of their contributors on the publicly filed Form 990-PF; public charities are not required to disclose donor identities on their public returns.12Internal Revenue Service. Public Disclosure and Availability of Exempt Organization Returns and Applications: Public Disclosure Overview
State compliance runs on its own track. Most states require nonprofit corporations to file an annual or biennial report with the Secretary of State confirming the entity still exists and its registered agent information is current. Fees are usually modest, but missing the filing can lead to administrative dissolution. If you registered for charitable solicitation, that registration renews on its own schedule, and each state you fundraise in adds its own cycle. No single agency will remind you of all of it, which is why foundations most often fall out of compliance here without noticing.