1: ASSOCIATION OF SMALL FOUNDATIONS Primer Series Brief papers on hey small foundation topics How to Start a Private Foundation By Sara Beggs, Association of Small Foundations Please return to the library of GRANTMAKERS of Oregon and Southwest Washington 425 NW 10th Avenue Suite 400 Portland, Oregon 97209 Member Member LTION OF k31UNDATIONS ns with few or Association of Small Foundations Primer Series 13 120 staff allfoundations.org How to Start a Private Foundation By Sara Beggs, Association of Small Foundations ASF Primer Series Editors: Andy Carroll and Joseph Foote Table of Contents Educate Yourself About Various Charitable Vehicles Determine the Type of Private Foundation Structure the Foundation as Either a Charitable Trust or a Nonprofit Corporation Establish Your Foundation with the State Obtain an Employer Identification Number Apply to the IRS for Tax-Exempt Status Register With the Attorney General's Office, If Necessary Operate Your Private Foundation According to the Laws IX. Conclusion DISCLAIMER: The Association of Small Foundations cannot be held liable for the information provided in this Primer. We strongly encourage you to consult your attorney to ensure compliance with federal and state laws and regulations. I. Educate Yourself About Various Charitable Vehicles Generally, a private foundation has four characteristics: It is a charitable organization; It is initially funded from one source (usually an individual, a married couple, a family or a business); Its ongoing income derives from investments (in the nature of an endowment fund); and It makes grants to other charitable organizations rather than operating its own program (except in the case of a private operating foundation). If you have not identified a funding source for your endowment but have a great program idea, you may actually be more interested in forming a public charity rather than a private foundation. You can find information on forming public charities in Starting a Nonprofit Organization at www.boardsource.org . Visit the E-Books section of their Bookstore to view and download the publication. Even if you have funds to put toward a charitable purpose, you should consider the advantages and disadvantages of starting a private foundation versus using some other giving vehicle. For a summarized comparison of some of your main options, see the following two links: http://www.goulstonstorrs.com/uploadedFiles/Newsstand/Media_Articles/chart.pdf http://wvvw.nyrag.org/info-url nocat3756/info-url nocat_show.htm?doc_id=140254 If you would like more information on the foundation option. we recommend consulting the book First Steps in Starting a Foundation, by John Edie and published by the Council on Foundations. We also strongly recommend consulting an estate planning attorney or an attorney concentrating in tax-exempt organizations. © 2006, Association of Small Foundations. All rights reserved. www.smallfoundations.org . II. Determine the Type of Private Foundation If you determine that a private foundation is the appropriate charitable vehicle for you, you must then consider the type of private foundation that most appropriately matches your long-term goals and capabilities. The Internal Revenue Service (IRS) distinguishes among three different types of private foundations, which are further described below. The descriptions below, however, are simply overviews and not comprehensive analyses of the regulations governing these entities. Although the initial foundation structure can be changed, it can be a complicated process and should only be done with the aid of an attorney and accountant. A. Standard Private Foundations Standard private foundations, also referred to as private non-operating foundations, are the most common form of private foundation. Standard private foundations vary in size and purpose. They typically obtain funding from a single bequest, or may receive annual contributions from an individual, group of individuals, or members of a family. The primary purpose of standard private foundations is to make grants to public charities, rather than operate any substantial programs. Standard private foundations must spend an amount equal to at least 5% of its net investment assets on qualifying grants and administrative expenditures annually. Corporate foundations follow the same regulations as standard private foundations, but the funding source of a corporate foundation is a business, rather than a family or individual. 1. Tax Deductibility of Gifts to a Standard Private Foundation Cash Gifts. When a donor makes a cash gift to a standard private foundation, his or her tax deduction is limited to 30% of the donor's adjusted gross income, with a 5-year carryover privilege for amounts in excess of the 30% limit. Gifts of Appreciated Property. A donor's deduction for gifts of appreciated property, such as closely held stock and real estate, to a standard private foundation is limited to the property's adjusted basis, which is generally the cost of the property. A donor's contribution of most publicly traded stock to a standard private foundation, however, is deductible up to the stock's fair market value. In addition, a donor's deduction for all gifts of appreciated property is further limited to 20% of his or her adjusted gross income, with a 5-year carryover privilege for amounts in excess of the 20% limit. 2 2006, Association of Small Foundations. All rights reserved. www.smal I foundations.org . 2. Tax Deductibility of Gifts to a Standard Private Foundation Compared with Tax Deductibility of Gifts to a Public Charity Donors are entitled to more liberal tax deductions for gifts to public charities than for gifts to private foundations. Cash Gifts. A donor's tax deduction is limited to 50% (rather than 30%) of the donor's adjusted gross income for cash gifts to a public charity, with a 5-year carryover privilege for amounts in excess of the 50% limit. Gifts of Appreciated Property. Contributions of appreciated property to a public charity are deductible at their full fair market value, except that contributions of appreciated tangible personal property must be related to the public charity's exempt purpose, or else the donor is limited to deducting his or her basis in the property. A donor's tax deduction is limited to 30% (rather than 20%) of the donor's adjusted gross income for gifts of appreciated property to a public charity, with a 5-year carryover privilege for amounts in excess of the 30% limit. Please note that the above limitations apply only to lifetime gifts. Bequests, whether to a private foundation or a public charity, are fully deductible from the donor's estate. B. Private Operating Foundations Private operating foundations, although still usually funded primarily by one source, use the bulk of their resources to carry out their own charitable programs, rather than making grants to other charitable organizations. To qualify as an operating foundation, the organization must spend at least 85% of its annual adjusted net income or its minimum investment return for the operation of its charitable activities and meet certain tests set forth in the Internal Revenue Code of 1986, as amended (Code). Although a private operating foundation is subject to most of the excise tax rules to which a standard private foundation is subject (further described below), a major benefit is that donors to a private operating foundation may take advantage of the more liberal income tax deduction rules generally applicable to gifts to publicly supported charities. In other words: a) Cash Gifts. A donor's deduction is limited to 50% (rather than 30%) of his or her adjusted gross income for cash gifts to an operating foundation, with a 5-year carryover privilege for amounts in excess of the 50% limit. h) Gifts of Appreciated Property. A donor's deduction is limited to 30% (rather than 20%) of his or her adjusted gross income for gifts of appreciated property to a private operating foundation, with a 5-year carryover privilege for amounts in excess of the 30% limit. Perhaps more importantly, contributions of appreciated property to a private operating foundation are deductible at their full fair market value, except that contributions of appreciated tangible personal property must be related to the public 3 © 2006, Association of Small Foundations. All rights reserved. www.smallfoundations.org . charity's exempt purpose, or else the donor is limited to deducting his or her basis in the property. C. Pass-Through or Conduit Foundations Conduit foundations are similar to standard private foundations because they do not directly operate charitable activities. However, the key difference is that none of the donations to a passthrough foundation can be used to build an endowment. Instead, all of the gifts (plus all of the foundation's income) must be distributed to public charities within 2-1/2 months after the end of the tax year in which the donor made the gift to the foundation. A conduit foundation offers a donor the same tax deductions as an operating foundation and a public charity: Cash Gifts. The donor's tax deduction is limited to 50% of his or her adjusted gross income for cash gifts to the conduit foundation, with a 5-year carryover privilege for amounts in excess of the 50% limit. Gifts of Appreciated Property. The donor may deduct up to 30% of his or her adjusted gross income for property gifts of appreciated property to the conduit foundation, with a 5-year carryover privilege for amounts in excess of the 30% limit. Typically a donor would choose a conduit foundation if the donor wants to establish the foundation structure and take advantage of more liberal tax deductions, but does not want to fully fund the foundation until his or her death. 4 © 2006, Association of Small Foundations. All rights reserved. www.smallfoundations.org . III. Structure the Foundation as Either a Charitable Trust or a Nonprofit Corporation Once you have decided upon the type of foundation, you should determine whether to structure the foundation as a trust or a nonprofit corporation. Below is a brief explanation of the advantages and disadvantages of each entity, which will vary somewhat depending on state law. However, legal counsel should further assist you in your decision and should assist you in the necessary filings. A. Charitable Trusts A private foundation organized as a charitable trust is governed by a trust agreement that appoints the initial trustees, designates the trustees' initial powers, and provides for the future selection of trustees to manage and operate the foundation. Advantages of Charitable Trusts Over Nonprofit Corporations Trusts are typically simpler to create and operate than corporations. Trusts have fewer requirements concerning trustees, state filings, regularity of meetings, minutes, etc. Trusts also have lower taxes for any unrelated business income. Disadvantages of Charitable Trusts Compared With Nonprofit Corporations Trusts generally offer less flexibility than nonprofit corporations. For example, court approval is generally required for any changes to the trust agreement. For some people, however, this inflexibility may be desirable to ensure their funds stay directed towards a specific cause or charity. In addition. because trustees are subject to restrictions relating to the delegation of their duties, trustees may be required to be more directly involved in the foundation than directors of nonprofit corporations. Trustees also may have less protection than corporation directors in the case of ill-advised decisions. Lastly, trusts can receive deductible donations from corporations only if they are to be used within the United States. B. Corporations A private foundation organized as a nonprofit corporation must normally file Articles of Incorporation with the state Secretary of State. A nonprofit corporation is governed by a board of directors that elects officers and carries out and properly records the foundation's activities. 1. Advantages of Nonprofit Corporations Over Trusts Nonprofit corporations offer a tremendous amount of flexibility that is not present in the trust structure. For example, revising the governing documents such as the Articles of Incorporation and bylaws is relatively easy and allows the foundation to operate in a manner that is responsive to community needs. A nonprofit corporation also generally provides directors with greater protection from personal liability. 5 0 2006, Association of Small Foundations. All rights reserved. www.smallfoundations.org . 2. Disadvantages of Nonprofit Corporations Compared With Trusts Nonprofit corporations have more formal operating requirements than trusts and are therefore slightly more difficult to create. As mentioned above, a nonprofit corporation is required to file Articles of Incorporation with the state Secretary of State. Many states also require regular meetings. minutes, and annual reports. ********* Because of the great flexibility and liability protection, the corporate structure is used more often than the trust structure. 6 © 2006, Association of Small Foundations. All rights reserved. www.smal I foundations.org . IV. Establish Your Foundation with the State Because trusts and nonprofit corporations are regulated by state law rather than federal law, you must follow the specific state tiling requirements when creating a foundation. Below are some of the general state filing requirements, but it is very important to adhere to the specific Mint; requirements in the foundation's state of organization. Further, because a nonprofit corporation is more common than a trust as a foundation structure, we will more specifically describe the steps necessary to develop a nonprofit corporation. A. Establishing a Trust To create a trust, you should consult with a qualified estate planning attorney or an attorney concentrating in tax-exempt organizations. The trust document should include the following information: The name(s) of your trustee(s); A statement of the charitable purpose; Distribution guidelines for ongoing grantmaking and the potential dissolution of the trust; Name(s) of successor trustee(s) or an outline of a process for trustee selection; A statement of the term of the trust, if any; A clause prohibiting private inurement and lobbying; and Statements that the foundation will abide by sections 4941 through 4945 of the Code. B. Establishing a Nonprofit Corporation Articles of Incorporation Bylaws Hold an Organizational Meeting Minute Book Each of these is described below. 1. Articles of Incorporation The first step in organizing a nonprofit corporation is to draft the Articles of Incorporation (also sometimes referred to as Articles of Organization) and file the Articles with the state Secretary of State. The Articles of Incorporation serve as the formal document that establishes the foundation. You must file the Articles of Incorporation with the state Secretary of State or other appropriate state office and enclose the required filing fee. The amount of the filing fee depends on the state of incorporation. If you request expedited filing (which increases the filing fee), the state will likely approve the filing within 1 or 2 days; if you do not request expedited filing, the state may take about 3 to 4 weeks to approve the filing. Once the filing is approved, the corporation is considered in existence. 7 C) 2006, Association of Small Foundations. All rights reserved. www.smallfoundations.org . Articles of Incorporation generally should include the following provisions: Corporation Name Purpose of Organization Registered Agent and Address Incorporators' and/or Initial Directors' Names and Addresses e) Provision for Asset Distribution Upon Dissolution 0 Method for Amendment of the Articles of Incorporation Clauses Prohibiting Lobbying, Political Campaigns, and Private Inurement Adherence to Code Sections 4941 through 4945 Each of these is described below. Corporation Name Some foundations choose a name recognizing the family or company that provided the original source of funding (e.g., The Judith L. Weymouth Foundation, The Pearle Vision Foundation). Other foundations choose a name that will highlight the cause or mission of the organization (The Foundation on Aging or Youth Development Foundation). Once you have selected a name, you should confirm that the name is available with the state of incorporation. Purpose of Organization Federal law requires every foundation's existence to be for religious, charitable, scientific, testing for public safety, literary, or educational purposes. The purpose of the foundation must be described in the Articles of Incorporation. Some states allow a very general purpose statement; other states, such as Massachusetts, require at least one specific purpose. A broad purpose statement in the Articles allows for maximum flexibility, which may minimize revisions (and legal fees) over time. On the other hand, a more specific purpose may help direct future directors in maintaining the initial mission of the foundation. Registered Agent and Address States require that a resident agent be designated in the Articles of Incorporation. The purpose of the resident agent is to receive the service of process if the foundation were to be sued for any reason. Your lawyer or accountant may serve as the foundation's registered agent. In addition, various companies may act as your registered agent. Incorporators' and/or Initial Directors' Names and Addresses This information is public, so consider whether to use a home or office address. 8 © 2006, Association of Small Foundations. All rights reserved. www.smal I foundations.org . e) Provision for Asset Distribution Upon Dissolution The Articles of Incorporation must contain a clause providing that at the foundation's dissolution, all the assets shall be disposed of for charitable purposes (the clause may either identify specific charities, or indicate that the board of directors will have discretion to determine the charitable beneficiaries). Some states have provisions providing that the corporation will be automatically dissolved if the corporation fails to file the necessary state documents (such as annual reports) in a timely manner. 1) Method for Amendment of the Articles of Incorporation Include a statement detailing the way in which to amend the Articles. Clauses Prohibiting Lobbying, Political Campaigns, and Private Inurement Include a statement that states the foundation will not make the prohibited expenditures above. Adherence to Code Sections 4941 through 4945 The Articles must include a statement that the foundation will comply with the requirements of sections 4941 (self-dealing), 4942 (required distributions), 4943 (excess business holdings), 4944 (jeopardy investments), and 4945 (taxable expenditures) of the Code. 2. 13N laws After the Articles of Incorporation are filed, you must prepare the bylaws. The bylaws specify the operations and rules of conduct for the foundation. Once again, each state will have its own specifications with respect to the content of the bylaws. For example, many states have specific requirements such as the minimum number of board members, frequency of board meetings, etc. Your attorney can draft these provisions for you, but you should be involved in the process, especially when state law allows for flexibility in the bylaw provisions. You should follow the laws of the state where the foundation is incorporated. Common elements of bylaws include: Officers and Directors Meetings of Directors Meetings of Members Other Duties Each of these is described below. a) Officers and Directors The general powers of the board of directors; The responsibilities, number, and length of the term of the directors, as well as the method for selecting, replacing, and removing directors; Compensation of the directors, if any; 9 © 2006, Association of Small Foundations. MI rights reserved. www.smallfoundations.org . The number, title and duties of the officers (such as president, vice-president, secretary, and treasurer) and terms of office, as well as the manner of electing and removing officers and filling vacancies; and A provision indemnifying officers and directors and establishing the rights of indemnified individuals. b) Meetings of Directors Notice requirements needed to call meetings, the meeting schedule, and definition of a quorum; Voting requirements and the manner, if any, for taking informal actions; Whether standing committees will be established and if so, what type of standing committees will be established; and A provision allowing for the creation of ad hoc committees. c) Meetings of Members A statement as to whether the foundation will have a member structure. A membership structure gives special status to certain individuals, who may or may not be directors themselves. A member usually selects the directors and therefore has ultimate control over the foundation; If the foundation does have members, the powers of the members, the responsibilities of the members, the number of members, and length of the term (if any) of the members, as well as the method for selecting, replacing, and removing members; and If the corporation does have members, the date for the annual meeting and the requirements for calling special meetings. d) Other Duties A list of the officers that have the power to handle assets and bind the foundation with respect to contracts, loans, checks, deposits, investments, and expenses; A statement regarding the tax year of the foundation (whether a calendar or fiscal year); and The procedures for amending the bylaws. Bylaws are not static, and the board should review them regularly. Bylaws should accurately reflect how the foundation operates and should remain relevant. Accordingly, it may be necessary to amend the bylaws periodically. Keeping bylaws simple in language and content can help ease this process. Some foundations appoint a task force to review the bylaws and make 10 © 2006, Association of Small Foundations. All rights reserved. www.smallfbundations.org . suggestions for revision to the whole board. After the bylaws are revised, they should be approved by the full board. The date of the board approval should be indicated on the revised bylaws. 3. Hold an Organizational Meeting After the Articles of Incorporation are filed and the bylaws are drafted, your foundation must have an organizational meeting to accomplish the following tasks: Adopt the bylaws; Elect directors and officers (if not specified in the Articles of Incorporation); Adopt the corporate seal, if you have one or if required by the state; Adopt a resolution permittin g the opening of appropriate bank accounts and specifying signing authority, and sign bank signature cards; Establish the foundation's fiscal year, if not specified in the bylaws; Authorize payment of initial expenses; and Authorize officers to file for tax exemption. The secretary should take minutes of the organizational meeting as well as all future board of directors' meetings. 4. Minute Book The secretary should create and retain a minute book that will include the foundation's Articles of Incorporation, bylaws, and minutes of all of the meetings. ************ Although establishing and operating a nonprofit corporation appears to be a lot of work, the reward, as stated above, is that a nonprofit corporation is more flexible than a foundation structured as a trust. V. Obtain an Employer Identification Number Even if the foundation does not have any current or anticipated employees, the foundation must obtain an employer identification number. To obtain an employer identification number, you should complete Form SS-4, "Application for an Employer Identification Number." You can locate and complete Form SS-4 online by visiting the IRS's Web site at www.irs.gov . Follow the links from the homepage to Forms and Publications. You can download the form by its number. © 2006, Association of Small Foundations. All rights reserved. www.smallfoundations.org . VI. Apply to the IRS for Tax-Exempt Status After you have completed the steps above, you must apply to the IRS for tax-exempt status. To obtain the necessary forms to apply for tax exemption, you may contact the IRS by calling 877829-5500, or download the forms from the IRS's Web site at www.irs.gov . Follow the links from the homepage to Forms and Publications. You can download the form by its number. A. Form 1023 — Application for Recognition of Exemption You must apply to the IRS for tax-exempt status by completing Form 1023: "Application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code." Because of the comprehensiveness of Form 1023, an estate planning attorney, an attorney concentrating in tax-exempt organizations, or a qualified accountant should help you complete the document. Form 1023 requests information about the foundation such as the following: Purpose and activities; Main sources of financial support; Plans for fund-raising, if any; Contact and compensation (if any) information for directors or trustees; Potential lobbying or political activities; Type of grantmaking along with any special grantmaking plans (such as providing scholarships, which will require detailed procedures); Current year revenue and expenditures; Proposed estimated budget for the next 2 years (you aren't bound by this budget); and Articles of Incorporation and bylaws or trust document. If you submit the Form 1023 within 15 months of the date the foundation was formally organized (i.e., the date the Articles of Incorporation were filed or the trust was established), the foundation's tax-exempt status will be retroactive to the date of incorporation of the nonprofit corporation or the establishment of a trust. If Form 1023 is filed after the 15-month period (and any extensions), the foundation's tax-exempt status will begin on the date of IRS approval. A page-by-page guide to Form 1023 is available at http://www.form1023help.com . B. Form 8718 - User Fee for Exempt Organization Determination Letter When you file Form 1023 with the IRS, you must include Form 8718: User Fee for Exempt Organization Determination Letter, which can be found at www.irs.gov . You must also include the proper user fee. Follow the links from the IRS's homepage to Forms and Publications. You can download the form by its number. C. IRS Determination Letters Once the proper documents are filed with the IRS, you simply wait for your IRS determination letter, which you should receive in approximately three to five months. You may be required to answer additional questions before it is issued. 12 © 2006, Association of Small Foundations. All rights reserved. www.smallfoundations.org . Register with the State Attorney General's Office, If Necessary Many states require charities to register with the state Attorney General's office, in addition to incorporation with the Secretary of State's office. You should check the requirements of any state where your foundation will be operating and register appropriately with the state. Operate Your Private Foundation According to the Laws Although standard private foundations provide donors with numerous benefits, they are also subject to several important restrictions and taxes, as described below. Please note that this overview is just that—a review of the main rules governing private foundations. The ASF Primer Legal Essentials for Small Foundations and Foundation in a Box offers additional information on legal matters. Also, ASF recommends that all foundations consult with legal counsel on an ongoing basis to get answers to specific questions. ASF's Professional Directory for Foundations lists attorneys nationwide who have been nominated by members as being experienced in foundation work. This section has two parts: File the Appropriate Tax Forms Adhere to the Main Rules Related to Private Foundations A. File the Appropriate Tax Forms Form 990-PF This is the foundation's annual federal tax return, with detailed financial activity. If a tax deadline passes during the time you are waiting for your tax-exempt status recognition, you must tile a Form 990-PF with the Internal Revenue Service (IRS) and state authorities as if your federal tax-exempt status had been granted. Form 990-T A foundation must file this form if it receives $1.000 or more in gross income from an unrelated trade or business or debt-financed income. 3. Form 8109 File this form with estimated quarterly tax payments for the excise tax on investment income (file only if paying annual tax over $500). 13 © 2006, Association of Small Foundations. All rights reserved. www.smallfoundations.org . Possible Additional State Requirements The federal Form 990-PF must be filed with the state of incorporation, as well as the state of your principal office. Many states also have additional reporting requirements. Employment-Related Filings The above does not include forms filed quarterly related to employment tax withholding, retirement fund accounts, or non-employee compensation. B. Adhere to the Main Rules Related to Private Foundations Sections 4940 through 4945 and 6104 of the Code contain rigorous rules regarding the governance of standard private foundations and private operating foundations. Remember: You must follow state laws as well, which are becoming more demanding in many cases. More information on tax and legal rules is in ASF's Primer, Legal Essentials for Small Foundations, available at www.smallfoundations.org . This section has seven parts: Section 4940 Excise Tax Based on Investment Income Section 4941 Taxes on Self-Dealing Section 4942 Taxes on Failure to Distribute Income (5% Payout) Section 4943 Taxes on Excess Business Holdings Section 4944 Taxes on Investments That Jeopardize Charitable Purpose Section 4945 Taxes on Taxable Expenditures 7. Section 6104 Public Disclosure Rules 1. Section 4940 Excise Tax Based on Investment Income Foundations are responsible for paying an excise tax on their investment income each year. For tax returns filed after August 17, 2006, foundations must pay this excise tax on an expanded list of types of investment income. See the Legislative Update page at www.smallfoundations.org for more information. The tax is usually 2% of net investment income, though it can be reduced in certain cases to 1%. If the annual estimated tax is expected to be $500 or more, the excise tax must be paid quarterly, on dates set by the Code corresponding to your fiscal year. 14 © 2006, Association of Small Foundations. All rights reserved. www.smallfoundations.org . 2. Section 4941 Taxes on Self-Dealing The basic rule is that any direct or indirect transaction between a private foundation and a disqualified person is prohibited, unless it is permitted under a specific exception. A partial listing of disqualified persons includes: officers, directors, trustees, substantial contributors to the foundation, an owner of more than 20% of a business that is a substantial contributor to the foundation, and any member of the family of any such manager, substantial contributor, or owner, including ancestors, spouses, and direct descendents. You should check with legal counsel for a complete list of disqualified persons. Some of the direct or indirect transactions include: Sale, exchange, or lease of property; Lending of money or extension of credit; Furnishing goods, services, or facilities; Satisfying a disqualified person's enforceable pledge; and Transferring the foundation's assets or income to a disqualified person, or use for the benefit of such a person. (Exception: trustees/directors can be compensated for some services, and family members can be hired as staff, if both the services performed and compensation are necessary and reasonable.) 3. Section 4942 Taxes on Failure to Distribute Income (5% Payout) Every year private foundations must distribute an amount equal to at least 5% of their assets for qualified charitable purposes. Qualified charitable purposes include, but are not limited to, grants, reasonable administrative expenses, and direct charitable activities. Expenditures made to produce income (investment management fees, etc.) cannot be included. Legislation enacted in 2006 also prohibits private foundations from counting grants to certain supporting organizations as part of their 5% payout (supporting organizations are classified as (509)(a)(3) public charities). See the FAQs at vvww.smallfoundations.org for more information. Section 4943 Taxes on Excess Business Holdings Generally, a foundation together with its disqualified person(s) cannot collectively own more than 20% of any business enterprise, whether incorporated or unincorporated. If you can satisfy the IRS that effective control of a business enterprise is in an individual or entity other than the foundation and its disqualified persons, a 35% limit may be substituted for the 20% limit. Section 4944 Taxes on Investments That Jeopardize Charitable Purpose A foundation may not invest either its income or principal in a manner that may jeopardize its ability to carry out its charitable purpose. No specific investments or investment policies are per se prohibited under this statute; trustees and directors must make prudent decisions about the foundation's investments. 15 © 2006, Association of Small Foundations. All rights reserved. www.smallfoundations.org . 6. Section 4945 Taxes on Taxable Expenditures Foundations are liable for taxes on certain expenditures that are 1) prohibited; or 2) in an IRSspecified area without following the respective IRS rules. These are called taxable expenditures. The following are prohibited: Non-charitable expenditures; Influencing public elections; and Lobbying. The following grants require special steps to be compliant: Grants to individuals; U.S. or foreign organizations that are not public charities; Grants to certain supporting organizations; supporting organizations are classified as (509)(a)(3) public charities; Voter registration; and Public policy or advocacy efforts. Note: The law allows foundations considerable leeway in this area, however. See ASF's Primer Funding and Engaging in Advocacy. 7. Section 6104 Public Disclosure Rules Private foundations are required to make the following information accessible for public inspection upon request: The foundation's three most recent years' Forms 990-PF (including names and addresses of contributors and trustees of the foundation); The foundation's initial IRS Form 1023 (application for tax-exempt status) and all related correspondence; and The foundation's 990-T (unrelated business income tax return, if any). More information on public disclosure rules for foundations, including how you can use the Web to fulfill disclosure responsibilities, is in ASF's Primer, Keeping Good Records: Small Foundations' Guide to Staying Organized, available at www.smallfoundations.org . IX. Conclusion Private foundations, if operated correctly, can provide significant benefits to individuals, families and companies. They provide tax benefits to taxpayers and enable them to build a long-lasting tradition of charitable giving. For more information about resources that can assist you in starting your foundation, please contact the staff at the Association of Small Foundations, at either [email protected] or 202-580-6560. 16 © 2006, Association of Small Foundations. All rights reserved. www.smallfoundations.org . ASSOCIATION OF SMALL FOUNDATIONS for Jo- undations with few or no staff Primer Series Very clear. Very comprehensive. Very concise. Your time is extremely valuable. Let ASF research, sift, and summarize the best information for you. The ASF Primer Series gives you key information on key topics - in just a few pages. ASF Primers help you to plan, brainstorm, and set up efficient operations. You'll come away with good questions for your board, staff, and advisors - saving you time and money. For the most recent list of titles in the ASF Primer Series visit the ASF Bookstore at www.smallfoundations.orq The Association of Small Foundations (ASF) is a membership organization of over 3,000 foundations with few or no staff. ASF enhances the power of small foundation giving by providing the donors, trustees, and staff of member foundations with peer learning opportunities, targeted tools and resources, and a collective voice in and beyond the philanthropic community. Foundations with few or no staff represent half of all foundation giving in the United States. ASSOCIATION OF S SMALL FOUNDATIONS for foundations with Pa' or no staff 1720 N Stmet, NW Washington, District of Columbia 20036 Primer Series Order Form Name Organization Address Phone Email Delivery (PLEASE CHOOSE ONE): q Mail+El Email PDF $1 S&H fee per primer on all mailed Primers PRICING: ASF Member: $10 per Primer; Non-Member: $15 per Primer QTY. Total Price n Awarding Grants to Individuals n Basics of Proposal Review n Bringing on the Board: Practical Steps for Orienting Foundation Board Members n Communicating with Grantees n Connecting to Your Family's Foundation: A Primer for the Next Generation n Creating a Strategy and Plan for Your Foundation's Investing ($20/S30) n Disaster Grantmaking Strategies: Response & Prevention for Small Foundations n Effective Governance for Unstaffed Foundations n Financial Reporting for Private Foundations n Funding and Engaging in Advocacy n How Technology Can Help You Mana ge Your Foundation n How to Avoid Self-Dealing FREE n How to Start a Private Foundation (No Shipping Charge) n International Grantmaking: Opportunities for Small Foundations n Involving Children in Philanthropy n Keeping Good Records n Legal Essentials for Small Foundations n Leveraging Your Assets with Loans and Other Program Related Investments (PRIs) n Making Plans for Succession: What Founders Need to Know n Policymaking Made Clear: Eleven Foundation Policies Your Board Should Consider FREE n Principles of Foundation Investment Management (No Shipping Charge) n Protecting Your Small Foundation with Insurance n Recruiting Foundation Trustees n Setting Up a Small Foundation Office n Trustee Compensation for Small Foundations n Working with Community Foundations Shipping and Handling Fee ($1 for each primer mailed) TOTAL:$ Please complete payment information on reverse ORDER FORM SUBJECT TO CHANGE • ASSOCIATION OF SMALL FOUNDATIONS_ for finmhttiony 7: • ith or no sni n -• N Strcct, NW Washington, District of Colninbia 20036 Primer Series Order Form Payment Information Total Price (from reverse): S I will pay by: Check (payable to ASF) Credit Card (check type): q MasterCard Credit Card Number Name on Credit Card Billing Address (if different from above) City Signature q Visa q American Express Exp. Date State Zip Code Please fax both pages of this form to 202-580-6579; or mail your order to: Association of Small Foundations 1720 N Street, NW Washington, DC 20036 Please call 888-212-9922 (202-580-6560 in DC area) with any questions. The Association of Small Foundations (ASF) is a membership organization glover 3,000 foundations with few or no she: ASF enhances the power of small foundation giving by providing the donors, trustees, and staff of member foundations with peer learning opportunities, targeted tools and resources, and a collective voice in and beyond the philanthropic community. Foundations with few or no staff represent half of all foundation giving in the United States.
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