How to Start a Family Foundation and Obtain Tax-Exempt Status: A Step-by-Step Guide

Starting a family foundation is an exciting step toward making a meaningful impact through charitable giving. In this post, we’ll walk you through the key steps required to establish a foundation and obtain 501(c)(3) tax-exempt status.

Whether you're planning to go the DIY route or enlist professional help, this guide will give you a clear understanding of the process ahead.

Setting Expectations: How Long Does It Take?

Forming a family foundation is more complex than setting up a standard company, primarily due to the IRS’s review process.

• In rare cases, approvals can come through in as little as three weeks—though this is highly unusual.

• More commonly, you should expect a processing time of approximately six months.

Step-by-Step Process to Set Up a Family Foundation

Step 1: Register with Your State

The first step is to register your charitable organization at the state level. This process is similar to setting up a company:

• Fill out the necessary forms (either online or by mail).

• Requirements and forms vary by state—tedious, but manageable.

• Important: Registering with the state does not automatically make your organization a federally recognized charity.

• Most states have a Charitable Organization Commission, which will later require your IRS determination letter.

Step 2: Obtain an EIN from the IRS

Next, apply for an Employer Identification Number (EIN) from the IRS.

• This step is straightforward, but you’ll need to choose the correct entity type to avoid issues.

• Keep in mind: Receiving an EIN does not mean you are recognized as a tax-exempt entity. Be sure to review the IRS correspondence carefully.

Step 3: File IRS Form 1023

This is the most substantial part of the process. Form 1023 is your formal application for 501(c)(3) tax-exempt status.

• The form is over 40 pages long and includes several required attachments.

• Key components to pay close attention to:

  • Mission Statement & Operations: Be specific—avoid vague goals like “make the world better.”

  • Three-Year Financial Projections: Your balance sheet must balance. Consider hiring help if you're not comfortable with the numbers.

  • Bylaws & Conflict of Interest Policy: These are mandatory and must be submitted with your application.

Once submitted, you’ll wait for your IRS determination letter. When you receive the message “We are pleased to inform you...,” congratulations—you’re officially tax-exempt!

Step 4: Finalize State-Level Charity Registration

With your IRS determination letter in hand, return to your state’s charity commission to complete the registration process.

• Most states will approve your status quickly once federal approval is granted.

• Note: Some states, like California, require additional forms—be sure to check your state’s specific requirements.

Summary

Starting a family foundation is achievable, but it does require time, patience, and attention to detail. To recap, the core steps include:

• Registering with your state

• Obtaining an EIN from the IRS

• Filing IRS Form 1023

• Completing your state-level charitable registration

While it's possible to handle this on your own, many choose to work with professionals to ensure accuracy and avoid delays.

This post is to be used for informational purpose only and does not constitute legal, business, or tax advice. Each person should consult his or her own accountant, attorney, or business advisor with respect to matters referenced in this post. Zhou Agency assumes no liability for actions taken in reliance upon the information contained herein.