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Tailor-Made Giving: Setting Up a Private Operating Foundation

In this article, we will discuss why someone may want to set up a private operating foundation, how to do so with the help of attorneys like those at Mauck & Baker, and if this option is right for you in your gift planning process.


What is a private foundation?

Often when we hear of private foundations it is in the context of very large entities such as the Bill and Melinda Gates Foundation, or the Carnegie Foundation for the Advancement of Teaching. Private foundations are 501(c)(3) organizations, organized and operated exclusively for designated charitable purposes. The main difference from public charities (such as churches, schools, hospitals, etc.) is that private foundations are operated with funds of private wealth or private source, whereas public charities receive public support and donations.


Private Foundation v. Private Operating Foundation

Most private foundations are grant-making foundations which means that most of their work is giving grants to public charities. However, some private foundations directly engage in charitable activities, and they are called private operating foundations. The law defines a private operating foundation as any private foundation that spends at least 85 percent of its adjusted net income or its minimum investment return (whichever is less) directly for the active conduct of its exempt activities (the income test). The key is “directly for the active conduct” of its exempt activities.

One of our clients wanted to engage in direct charitable activities and with their own funds. We explored other options, such as donating to another public charity that already performed similar charitable activities, or donating to donor-advised funds. However, the client informed us that they had tried that before, and they instead had the desire to serve and minister more directly.


Working with other public charities can sometimes be limiting in certain ways. If you feel limited by traditional giving, a private operating foundation may be a good option. Such an organization won’t qualify as a public charity because there is no public support; rather the organization will operate with the client’s own funds.


In order to qualify as private operating foundation there are several rules to follow, but they are generally able to be easily satisfied with a focused mission and specific charitable activities when the funds are from one single private source with minimum complications.


How to form a Private Operating Foundation

Forming a private operating foundation is the same process as all 501(c)(3) entities. A not-for-profit corporation will be incorporated with the Secretary of State of Illinois (Articles of Incorporation) and registered with the Illinois Attorney General; an EIN number will be obtained; bylaws and other corporate documents will be prepared and adopted; and the IRS form 1023 (Application for Recognition of Exemption Under Section 501(c)(3)) will be prepared and submitted.


Whatever your mission is, the attorneys at Mauck & Baker are happy to discuss how to best accomplish it and guide you through the legal and administrative process.


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