If your company is looking to start a charitable arm whether it’s a corporate foundation or other charitable endeavor – there are a few things to take into consideration before beginning the process. We’ll go over a few key considerations in this article, including the type of organization to start,the goal-setting stage, and the process of creating the organization legally. The advice outlined in this article is general, so if you’d like more tailored advice or you’re ready to get your corporate foundation started legally, request a free consultation with one of our nonprofit attorneys for assistance.
Setting Goals for your Charitable Organization or Project
First, it’s important to establish goals for your company’s charitable endeavors. You’ll want to start by establishing the who, what, where, & when of your charitable program.
Who: Every nonprofit needs a defined charitable class. This could be people suffering with a disease, an endangered species, or even other nonprofit organizations. It’s not uncommon for a corporate foundation to select more than one charitable class if you have multiple philanthropic priorities.
What: What will you do to serve your charitable class? It could be a scholarship fund for students pursuing STEM degrees, providing grants to charities that work with the homeless, etc.
Where: Will your program be local to your city or state? Or will it be a national or international program?
When: Will this project be ongoing? Once per year? Or are you looking to do a one-time event? Keep in mind that there is annual upkeep for a public charity or private foundation. If you’re looking to do a one-time event, it might be a better idea to partner with a local charity in your area rather than start your own corporate foundation. Or fiscal sponsorship can be a middle ground for many fledgling charitable programs that allows you to have a charitable branch without some of the administrative burden and upkeep.
If you’re looking to make a long-term impact and you have a charitable class in mind, starting a corporate foundation might be the right move. We have seven more in-depth questions to answer to see if you’re ready to start your nonprofit foundation now.
Should your corporate foundation be a public charity or private nonprofit?
There are plenty of misconceptions about the difference between a public charity and a private foundation. But there are a few key points to note in the context of a for-profit business starting a charitable branch:
- Both public charities and private foundations can be grantmaking organizations. So if you’re looking to provide grants or scholarships, as many corporate charities do, that doesn’t limit your choice.
- A key difference between private foundations and public charities is the requirements for the board of directors. Both types must have a board of directors, which for corporate foundations is often made up of employees and leadership from the company. But public charities have a few requirements for who can be on the board. A public charity cannot be governed entirely by members of one family, for example. You can read some of the other requirements here. Private foundations, on the other hand, can be governed by a board solely consisting of people who are all related, or are owners of the same business.
- Contrary to popular belief, having the word “foundation” in the name does not mean an organization is a private foundation. In fact, the vast majority of charitable organizations in the US are public charities.
- The requirements are different for private foundations vs public charities. Public charities have to be able to meet the public support test, for example. Private foundations are required to meet an annual 5% minimum distribution requirement based on the previous year’s net assets. We could go on, but as a general rule, private foundations are often subject to more stringent requirements and reporting responsibilities.
Selecting which type of charitable organization is right for your company’s charitable program is all about which vehicle will allow you to accomplish your philanthropic goals. It’s different in each scenario, so if you’d like to consult with an attorney with experience on the matter, let us know.
Is fiscal sponsorship right for your charitable project?
Fiscal sponsorship is a great option for charitable causes that aren’t ready to maintain the requirements for nonprofit status with the IRS. It can also be ideal for more short-term charitable endeavors.
Fiscal Sponsorship is a formal arrangement where a current nonprofit agrees to serve as an incubator of sorts for a charitable program that was created by someone else. This arrangement can give you the ability to accept tax-deductible donations and apply for grants without having to apply for your own tax exempt status.
In terms of corporate projects, this could be beneficial if you’d like to try out running a charitable program and don’t want to wade through the IRS paperwork to create a tax exempt nonprofit just yet. It can also make sense for shorter term projects like summer camp programs or temporary art installations. This eliminates the need to complete the annual pile of paperwork to maintain your nonprofit status with the IRS while still allowing you to apply for grants and accept tax deductible donations. You can read more about our fiscal sponsorship program here.
The process of starting a corporate foundation
There’s more to consider than just legal documents if you want to set up your corporate foundation for success. Before any of the paperwork begins, establish where you want to focus your charitable efforts. Our friends at Allies 4 Good recommend starting with your MV²P: mission, vision, values, and programming. This is more than just drafting up statements – this is about establishing the overall direction you’re taking and how you’re planning on getting there. Once you have this process completed, it’s time to form the legal entity.
Whether you decide to create a public charity or a private foundation, the process is very similar. You’ll establish the entity at the state level with Articles of Incorporation. Next, you’ll create your corporate documents, like bylaws and a conflict of interest policy. Though it’s not required, it can be helpful to have an experienced attorney involved during this step, as the IRS has very specific requirements for charitable entities. If your entity is set up incorrectly on the state level, it could lead to a rejection letter from the IRS when you seek tax exemption. It’s helpful to have someone with intricate knowledge of the process and the common pitfalls so you can ensure the process goes as smoothly and quickly as possible.
Next, you’ll create organizational actions which will help guide your board during the first board meeting. You’ll need to finalize your corporate documents and approve them at your initial board meeting. And of course, you’ll need to file for tax exemption with the IRS by completing Form 1023.
Again, the IRS tends to have very specific requirements during this step, so be mindful of that. Another factor to keep in mind is how long the IRS takes to process applications. For Form 1023, the typical timeline we see is between 6-8 months for approval, but you can always check their current wait time here.
Once you receive your determination letter from the IRS, you’ve officially created a tax exempt nonprofit organization. But for many company foundations, this shouldn’t be the last step during your infancy. To truly set your foundation up for success, get the right policies in place. Many corporate foundations need policies like a grantmaking policy, a scholarship policy, and/or a gift acceptance policy. These policies establish your practices and help protect your foundation from liability down the road. The old diatribe “an ounce of prevention is worth a pound of cure” is an understatement when it comes to having the right legal documents and policies in place.
Starting a corporate foundation or charity can be a rewarding way to bring your team together around a great cause. Whether you’re giving out scholarships to kids or cleaning up your local environment, there are so many great ways to get your company involved in giving back to the community. If you’d like an experienced attorney to help you establish your company’s nonprofit arm, schedule a consultation with one of our attorneys today.