Should We Start a Foundation or Charity?

Question by Ali: Should we start a foundation or charity?
Last October my mom passed away from having a drug addiction to prescriptions. So my friend came up with this idea that we start a foundation for my mom, and to help other addicts. Also, to help save lives, and help others not loose their loved ones like I did.

But as I started researching I kind of got confused on what exactly a foundation and what exactly a charity is.. so could someone explain it better to me please?

Also, I noticed that it may take some money for this, how much would you say? And what exactly does it take to start a foundation/ charity?

Best answer:

Answer by Susanne
Big questions.

Essentially, a public charity solicits donations from many sources, such as private citizens, other charities and private foundations.

A private foundation has pretty much one source of funding, usually a private family or a business. A foundation usually makes grants to other charitable organizations.

There is something called a private operating foundation which is organized as a foundation but acts more like a private charity, but for the sake of clarity don’t worry about that.

Things are complicated by the fact that many public charities have the word “foundation” in their names (mine does). This does not make them a foundation for IRS purposes.

There are tax advantages to being a public charity and the reporting is generally less complicated so most organizations will opt not to be private foundation if possible.

You’ll see that there are a number of “test” to determine whether you qualify as a public charity. One of them is that at least 20% of your group’s income comes from a source or sources other than your largest donor. Because you’re anticipating having a group of donors and (I would assume) asking the public for donations, I would organize as a 501 (c) (3) public charity.

As to your second question, I’m cutting and pasting the following from an answer I gave to someone else:

If you decide you want to go ahead with registering as a charity the first thing you need to do is write a formal mission statement. This is where you say exactly what your organization’s purpose is how you expect to go about it.

Next you’ll need a board of trustees (3 people minimum) willing to help you. You’ll need to write up Articles of Organization and bylaws and file them with your state. You should have these documents reviewed by a lawyer. It’s important that you get these right because they will determine the shape of your organization and whether your group will be eligible for tax deductibility.

Once you are approved as a charity in your state the next step is to register as a 501(c)(3) organization with the IRS. The advantage to registering with the IRS as a charity is that it makes contributions tax deductible. The disadvantage is that the process is time consuming and expensive. The minimum registration fee alone is $ 300 and you’ll have to do a ton of complicated paperwork, including annual reports and tax returns.

There are many other steps (getting an EIN, bank account, registering the name, etc.) but these are the big ones. As you can see, unless you have a lot of help and plan to continue your group well into the future you’re likely to be better off organizing your group as a community service club without the formal trappings of a foundation. The link below is to sample nonprofit articles of organization.

One option if you’re short on initial funds is to register as a charity with your state but forgo the IRS process. This would allow you to solicit funds but unfortunately money donated to your charity would not be tax deductible.

So sorry about your mom. Good luck with the charity.

Know better? Leave your own answer in the comments!


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