Create a Private Foundation

From Toolkit for Giving: Ways to Give

Private foundations are a popular, longstanding form of philanthropy in the United States.

What is a Private Foundation?

Private foundations are generally founded by an individual, a family or a group of individuals, and are organized either as a nonprofit corporation or as a charitable trust. You can appoint yourself, as well as other family members or friends, to sit on the foundation's governing board.

One common form of a private foundation is a family foundation. Families sometimes use a family foundation as a forum in which family members can work toward common goals, or as a way to instill the value of charitable giving in future generations of the family. Another common option that families use to accomplish the goals of their family philanthropy is to establish a donor advised fund at a community foundation (see Give to or Through a Community Foundation). To learn more about the differences between donor advised fund and a private foundation, see the Giving Options Summary Chart.

Since a private foundation is a charitable organization, it is exempt from federal income tax on its income, although it must pay a 1-to-2 percent excise tax on its net investment income. The gifts you make to establish a new foundation or grow an existing foundation can afford you certain tax advantages; income, gift and estate tax deductions are available under the law. Consult a professional advisor for details.

For some examples of private foundations, see the list of MCF's Private Family Foundation and Private Independent Foundation members.

Types of Private Foundations

There are three main types of private foundations: private endowed foundation, pass-through foundation and private operating foundation.

Private Endowed Foundation
This is the most common type of private foundation. The foundation's financial assets create a principal "” or endowment "” that is invested, and income from the endowment is paid out annually to charity. Generally, the principal or endowment is not spent, only the investment income. Therefore the principal can increase with good investment, ensuring the foundation's continuation and growth to meet future community needs. Private foundations are required by law to pay out annual grants and other qualifying distributions totaling a minimum of 5 percent of the fair market value of their assets.

Pass-Through Foundation
A pass-through foundation is a private grantmaking organization that distributes all of the contributions it receives each year (not just 5 percent of its assets). The pass-through option may be made or revoked on a year-to-year basis.

Private Operating Foundation
A private operating foundation uses the bulk of its income to actively run its own charitable programs or services. Examples include the operation of a museum, library, research facility or historic property. Some private operating foundations also choose to make some grants to other charitable organizations.

Next Steps

Online Resources

Association of Small Foundations: The Association of Small Foundations (ASF) is a membership organization for donors, trustees, employees and consultants of foundations that have few or no staff.

Council on Foundations: The Council on Foundations, a national membership association of grantmaking foundations and corporations, offers this helpful "Starting a Foundation" section.

National Center for Family Philanthropy: The Center focuses on matters of importance to families engaged in philanthropy and their effective giving. The Center has several useful publications and programs on starting and operating a private family foundation.

Help

The Minnesota Council on Foundations is available for one-on-one consultations. Contact the Council for more information.

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