How do you set up a corporate foundation?

There are two reasons that firms consider starting a corporate foundation. Either they feel it’s a necessary first step in a strategic corporate social responsibility program, or they’re looking for a way to formalize their charitable donations. Private Foundations are essentially separate corporations (or trusts) and are subject to all kinds of arcane tax and accounting rules, so it’s important to get the advice of a professional, like your attorney or CPA. If they’re good, they’ll ask what goal you’re trying to achieve, and recommend an appropriate course, which only occasionally involves starting a private foundation!

Valor CSR provides an alternative to this costly (and frequently unnecessary) process with a product called the Instant Corporate Foundation. It is essentially a corporate foundation co-op, which includes all of the benefits of a typical corporate foundation. Setup, compliance, and regulatory costs are spread across all co-op members, making the Instant Corporate Foundation very affordable. Please contact us for a free consultation and more information.

But the headline promises “How do you set up a corporate foundation?” so let’s answer that question.

What’s a Corporate Foundation?

The term “corporate foundation” doesn’t actually have any official definition in US tax code. Usually, however, it is used to refer to either a private foundation controlled by a corporation, or a public charity associated with a corporation. Each of these are variations on a theme, and while there are very important differences between the two, the process for setting them up is mostly the same.

How to set up a corporate foundation

Step 1: Determine what legal entity will become the foundation. This can either be a corporation or a trust, however most corporate foundations choose the corporate form because it is more familiar, provides some legal protection for the directors, and is a little bit more flexible. All variants of corporation are available, but since a nonprofit has no true ownership, a state’s “nonprofit corporation” form is usually sufficient.

Step 2: Elect trustees or board members. Typically these are selected from managers of the firm, or, in privately held firms, the owners.

Step 3: Incorporate the entity. This would include drafting and filing articles of incorporation and paying the appropriate fees to whichever state you are incorporating in.

Step 4: Obtain a Federal Tax ID (EIN) from the IRS. The IRS considers the date that you receive your EIN to be within your first accounting period. So if you get an EIN in November and your accounting year ends in December, your first tax return would be due in March. This is true even if you haven’t completed the rest of the steps, or haven’t actually received your tax exempt letter from the IRS.

Step 5: Complete IRS form 1023, or 1023-EZ. Both versions of Form 1023 are the “Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code.” Because there are several different types of organizations that are exempt under this section, part of the purpose of the form is to sort those organizations into the proper bucket, or public charity status. The public charity status is described in subsection 170 of the federal tax code

For example, the tax code treats a public charity [170(b)(1)(A)(vi)] very differently from a private foundation [170(b)(1)(A)(vii)] even though both of these are exempt under Section 501(c)(3). Many corporate foundations are funded from either company stock or a cash donation directly from the company. Because the donations are all from one source, the IRS would consider this a private foundation. On the other hand, if the foundation is funded from employee payroll deductions or the public, the donations are coming from multiple sources and the IRS could consider this a public charity. 

This is important at this step because the IRS only allows applicants to use the much shorter 1023-EZ in certain circumstances. If the corporate foundation will be a private foundation, or will receive more than $50,000 in any one year, or have total assets of more than $250,000 within the first three years, (or any one of several other restrictions,) you have to use the full 1023.

There are, however, many more considerations when determining which specific type of nonprofit entity the corporate foundation will become. It’s important to get the advice of a professional, like your attorney or CPA, who can advise you on what’s best for your specific circumstances.

Step 6: File the 1023 and pay the filing fee. A common request of nonprofits is to provide their “tax exempt letter” from the IRS. This is a holdover from a process that the IRS eliminated in 2008. Prior to that date, the IRS would respond to a filed and correct 1023 with an advance ruling letter. If the nonprofit had demonstrated through subsequent tax returns that they could still be classified as a public charity, the IRS would then send a final ruling letter. The final ruling letter stated that the organization was tax exempt as of a certain date. Unfortunately, unscrupulous charities continued to use their final ruling letter despite no longer meeting the requirements of a public charity. 

From 2008, the IRS no longer makes advance rulings or sends final ruling letters. The determination letter that is sent simply lists the effective date of exemption, which is the date you acquired your EIN, and confirms your public charity status. Each subsequent year, when the organization’s tax return is due, the information collected on that form either confirms or changes the organization’s public charity status.

Because the determination letter lists the date that the EIN was obtained, that is also the date that the organization can accept tax deductible donations. 

The filing fee varies depending on the form filed and the annual revenues of the organization. The fee for filing Form 1023-EZ is $250. If annual revenues for the first four years are less than $10,000, the fee for filing Form 1023 is $400, otherwise, the fee is $850.

Step 7: File the Form 990, or Form 990-PF. At the end of the fiscal year that contained your application for the EIN, you must file a tax return. Depending on your public charity status and annual revenue, you will either file a Form 990, Form 990-N, or Form 990-PF. The form 990-N, sometimes referred to as the e-Postcard, is a very short tax return form that is only available to certain eligible organizations, as listed here

It’s important to remember that the Form 990 series does two important things. It allows you to reaffirm and retain your tax exempt status each year, and it automatically categorizes you into a new public charity status when appropriate. For example, if you fail to reach the public support test over a five-year period, your organization will change from a public charity to a private foundation.

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If the above sounds confusing, time-consuming and expensive, that's because it is. For an affordable alternative that's just as effective, please contact us for a free consultation.