There are many factors to consider when becoming a philanthropist or starting a charity.   

  • Establishing a new charity requires many important considerations.
  • Adopting a strategic vision for the charity brings discipline and focus to philanthropy.
  • Prudent investing and fundraising are key to a charity’s growth potential.

Just as an individual goes through life cycles, so does a charity. From the start-up phase to adopting a strategic vision to looking at ways to grow the charity, there are many steps to consider at each important phase of the charity’s lifetime.

Start-up
A first critical phase in the life cycle of a charitable organization is the start-up period. Let’s take a look at some of the most important aspects of establishing a new charity. 
 
Formation
Some organizations are established by a trust under a will; others are established during the donor’s life. A charity is formed by a legal document—a charitable trust instrument or articles of incorporation for a nonprofit corporation. There is much more involved, however, to get up and running. Establishing tax-exempt status All charities with more than minimal assets must file an exemption application with the Internal Revenue Service, known as the Form 1023. If filed on a timely basis, once the application is approved, the charity will be tax-exempt for federal income tax purposes under section 501(c) of the Internal Revenue Code from the date of its formation. Some states also require a charity to file an application for exemption from state income tax. If the charity will be an active operating entity, it may also wish to obtain a sales tax exemption and exemption from real estate taxes for property it uses in carrying out its charitable activities.
 
Public charities versus private foundations
For federal income tax purposes, all charities are categorized as either public charities or private foundations, based on their purposes or funding sources. Charities that are churches, hospitals, or universities are automatically treated as public charities by virtue of their exempt purposes. Other charities, such as United Way-type organizations, achieve public charity status because they are broadly supported by the general public. Charities that do not meet either a purpose test or support test are “private foundations.” Typically, most family foundations, which are funded by a single donor or family, are private foundations. As discussed below, private foundations are subject to additional restrictions on their operations and activities 
 
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