How to Start a Private Foundation: Steps, Rules and Real Costs

To start a nonprofit foundation, in the sense most people mean, a private foundation funded by one person, family or company, you form a nonprofit corporation or charitable trust under state law, appoint a board, adopt bylaws and a conflict of interest policy, get an EIN, apply to the IRS for 501(c)(3) status, register with your state, then fund it and start making grants. The legal steps are the easy part. The hard part is the rules that apply from the first day: a 1.39% tax on investment income, a minimum payout of about 5% of assets a year, strict self-dealing prohibitions, and a public Form 990-PF every year that lists your donors and every grant. There are 129,853 private foundations filing with the IRS, and 7,152 were recognised in the twelve months to August 2026. The median holds $366,528, small enough that many founders would be better served by a donor-advised fund, which this page also covers.

First, decide whether you need a foundation at all

“Foundation” is used loosely. A charity that raises money from the public and runs programmes is a public charity even if its name says foundation; if that is what you are starting, follow how to start a nonprofit instead. A private foundation is defined by its money coming mainly from a small number of sources, usually one family, and by its job usually being to give that money away. The full comparison is in charity vs foundation vs nonprofit. For a donor deciding how to give, the realistic choice is between three structures.

The donor-advised fund is the alternative most founders should price first. A national sponsor such as Fidelity Charitable states it has no minimum initial contribution, with an administrative fee of 0.60% a year or $100, whichever is greater, and grants from $50. You get a larger deduction, no annual return, no excise tax and no payout rule, at the cost of control: the sponsor legally owns the money and approves each grant. A foundation is worth its costs when you want permanent family governance, to employ people, to run programmes directly, to make grants a fund sponsor will not, or to build an institution that outlasts you.

How big private foundations actually are

From the IRS Business Master File, which records total assets from each foundation’s most recent return:

Nearly two thirds of private foundations hold under $1 million, and more than a third hold under $100,000. Those small foundations carry the same annual filing, the same excise tax and the same self-dealing rules as the large ones. There is no legal minimum size, and any advice quoting one is a rule of thumb about whether the fixed costs of a foundation are worth paying. Run the numbers on your own giving: if the fixed costs of an accountant and the 990-PF are a meaningful share of what you will give each year, a donor-advised fund does the same job for less.

The steps

1. Choose the structure. A nonprofit corporation is the usual choice: it has a board, limited liability and familiar governance. A charitable trust is simpler to form in some states but less flexible to change. Both can be private foundations.
2. Choose operating or non-operating. Almost all foundations are non-operating, grantmaking foundations. A private operating foundation runs its own charitable programmes directly, such as a museum or research institute, and meets separate income and asset tests in return for some better tax treatment.
3. Name it and appoint a board. Family boards are common and legal. Add at least one person from outside the family; it improves decisions and makes self-dealing easier to avoid.
4. File articles of incorporation. State filing fees and steps vary; our state guides cover several. The governing documents must include the purpose and dissolution language the IRS requires of every 501(c)(3), and must also bind the foundation to the private foundation rules below. Many states supply that second part by statute, so check with the attorney who files.
5. Adopt bylaws and policies. Bylaws, a conflict of interest policy, a grantmaking policy and an investment policy. The conflict policy matters more here than at a public charity, because self-dealing taxes fall on individuals.
6. Get an EIN from the IRS online, as described in nonprofit EIN, and open a bank account in the foundation’s name; banks for nonprofits compares accounts.
7. Apply for 501(c)(3) status. Most foundations file the full Form 1023. The shorter Form 1023-EZ is open to a private non-operating foundation only if its total assets are $250,000 or less and its annual gross receipts have not exceeded $50,000, and not to a private operating foundation. The IRS sets the user fee and publishes it on Pay.gov; how to get 501(c)(3) status covers the application.
8. Register with your state where required, including any charity registration with the attorney general.
9. Fund it and set the payout calendar. Transfer the assets, document their value, and put the distribution deadline and the excise tax payment in the calendar from the first year.
10. Start making grants. Decide whether you accept applications or give only to organizations you choose; the 990-PF asks you to say which.

The rules that apply from day one

Two of these catch more founders than the others. The payout rule is about timing: the minimum for a year must be distributed by the end of the following year, so a foundation that is funded late in the year and makes no grants can be short before it notices. Self-dealing is about relationships rather than intent. Lending the foundation’s money to your company, renting it your office, or paying for a family member’s gala tickets from foundation funds are all self-dealing even if the price is fair. Grants to individuals, such as scholarships, need IRS-approved procedures in advance; can a nonprofit give money to individuals explains the general rules.

Every year: the Form 990-PF

Every private foundation files Form 990-PF, whatever its size, and it must be filed electronically. There is no postcard option like the 990-N that small public charities use. The return is public, and unlike a public charity’s, a private foundation’s contributors are disclosed. It lists every grant paid, with recipient, purpose and amount, in Part XIV, which is exactly what grantseekers read; how to find a nonprofit’s Form 990 shows how they find it. Budget for an accountant who prepares 990-PFs regularly, and for an audit if your state or your own policy requires one, covered in nonprofit audits.

What starting one costs

The costs fall into three groups. One-off: state filing fees, the IRS user fee, and legal fees for formation and the application, which vary widely with the complexity of the assets going in. Annual: accounting and 990-PF preparation, state renewals, the 1.39% excise tax, bank and investment fees, and insurance for the board. And the cost people forget: the time of whoever administers grants, keeps the records and watches the payout calendar. For a foundation giving away tens of thousands of dollars a year, these fixed costs are a large share of the giving; for one giving away millions, they are small. That ratio, more than any minimum asset figure, decides whether a foundation makes sense.

Charitable deduction limits for funding it

Gifts to a private non-operating foundation are deductible on less generous terms than gifts to a public charity. Under the IRS’s Publication 526, cash gifts are generally limited to 30% of adjusted gross income, against up to 60% for cash gifts to public charities and donor-advised funds, and gifts of appreciated capital gain property to 20%. Amounts over the limit can be carried forward for five years. For a founder planning a large gift of appreciated stock, that difference alone can favour a donor-advised fund for part of the gift. Deduction rules change with tax legislation, so confirm current limits with an adviser before a large gift.

How this page was put together

Counts and asset sizes are our analysis of the IRS Exempt Organizations Business Master File: every 501(c)(3) with a Form 990-PF filing requirement, assets from its most recent return, and recognitions in the twelve months to August 2026; script bin/analyse_bmf_filers.py. Tax rates and rules were read on the IRS’s private foundation pages, the Form 990-PF instructions, the Form 1023-EZ instructions and Publication 526 on 13 October 2026. The donor-advised fund terms are Fidelity Charitable’s own. This page explains rules; it is not legal or tax advice for your situation.

This is reference information, not legal or tax advice. Rules vary by state and change over time. For a decision that carries real consequences, check the current text at irs.gov or your state registry, and talk to a nonprofit attorney or CPA.