Private charitable foundations are usually started by an individual, family or a group of individuals to support charitable educational, religious or other causes that serve the public good. Private foundations either carry out these charitable activities themselves or they make grants to other non-profit organizations. According to the Foundation Center, a private foundation is a nongovernmental, nonprofit organization having a principal fund managed by its own trustees or directors. By transferring assets to a private foundation, you can create an endowment that will generate an income stream to allow your foundation to keep growing. Private foundations are exempt from federal income tax, are free from capital gains and estate tax liability and are entitled to some contribution tax deductions.
Define your foundation's mission. Think about what cause you are passionate about and how you will go about working towards it. A good mission statement should clearly state why you formed the foundation, the goals you want to achieve and how you will achieve them.
Estimate your finances. Legally, there is no minimum financial threshold for starting a private foundation. But you will still need to ascertain whether you have enough assets to endow the foundation as well as estimate the administrative expenses, such as staff salaries, legal fees and accounting fees, to keep the foundation running.
Acquaint yourself with the federal or state laws that govern private foundations. The taxation rules for private foundations, governed by the Internal Revenue Service (IRS) Code, are stricter than those for public charities. It may be best to consult an attorney as well as a public accountant to help you understand the legal and tax implications of starting and running a private foundation before actually setting it up.
Determine a framework for your operations. Will your foundation be directly engaging in charitable activities or will you be making grants to other charities? If you will be making grants, you need to establish procedures and guidelines for reviewing grant applications and also set geographical limits for grant-making.
Register the foundation with your state agency. Most state statutes require private foundations that solicit funds to register with the state, though the rules vary. In addition, you must apply to the IRS to obtain tax-exempt status. The application will require your foundation's mission statement and estimated budget, in addition to other information.
Open a bank account for your foundation and set up an office space if you plan to hire employees. Depending on how many grant applications you expect to receive and how long you expect the foundation to exist, you will need to hire experienced full-time or part-time staff who can review applications and make decisions. You may also need to set up a board of officers or elect an adviser from another private foundation.
Evaluate progress and maintain records. Once the foundation is up and running, evaluate the effectiveness of grants that have been approved and check to see if your organization is on track toward meeting its goals. Maintain a detailed financial record because the IRS requires that private foundations file Form 990-PF annually detailing income, expenses, contributions received and charitable distributions made.