The Internal Revenue Service (IRS) allows private charities to be exempt from taxes. But the benefits of a private charitable organization don't stop there. The initial donations required to start a charitable foundation are tax deductible and can be set up to give the donor the best possible tax break. The foundation can fund projects that would not otherwise be tax free. With some limitations, family members can receive income as employees of the foundation. This allows money to be passed from one generation to the next without estate taxes.
Choose the focus of the charity. Both the personal and public purpose of the charity need to be explored. Common public charitable avenues are education, medicine, and the arts. Use this focus as the centerpiece of the organization's mission statement. The private reasons for starting a charity may not be in the mission statement, but should be understood by all participants. For example, if one of the goals of the organization is to keep a far-flung family closer together, then make sure all family members understand and agree with this goal.
Choose the source of funding. This can take the form of private or public funding. Private funding is usually in the form of at least one large donation. This funding is invested. From that point on, donations from the charity are made from the interest the initial donation has earned. Public funding depends on using a wide range of fund-raising sources and activities. Some charities use a combination of private and public funds.
Organize your management hierarchy. Each state has its own laws and procedures for setting and managing a charity. Check with your state to file applicable documents.
Register with the IRS. Only after your organization has been approved by the state can you seek exemption from federal income taxes. This is done by filing an application for a 501(c)(3). The application must be completed within 27 months of the formation of the foundation.
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