How to form a nonprofit foundation: Ultimate guide for 2025

Most people begin with a strong purpose and just a bit of uncertainty. That’s normal. The good news? You don’t need to know everything up front. With the right steps, anyone can navigate the process of forming a foundation and doing it the right way.

This guide breaks it all down, step by step, so you can focus on what matters: building something that helps people, creates change, and stands the test of time. 

What is a nonprofit foundation and how does it differ from other nonprofits?

Let’s start with the basics. A nonprofit foundation is a type of organization built to support causes, not to make money. Instead of selling a product or service to earn income, foundations usually raise money through donations, grants, or investments, and then use that money to support other nonprofits or programs that align with their mission.

Now, here’s where people sometimes get confused. Not every nonprofit is a foundation, and not every foundation works the same way. Most foundations fall into one of two categories: public or private.

• Public foundations (like community foundations) get their funding from a lot of different sources, individual donors, businesses, and other nonprofits. They often give grants to smaller nonprofits doing work in the community.
• Private foundations are usually funded by one main source, like a family, an individual, or a company. These are the ones people most often think about when starting something personal or family-driven.

There’s also something called a donor-advised fund (DAF), which acts a lot like a private foundation but without all the setup work. DAFs are managed by public charities, and you can recommend how the money is used, but you don’t have as much control as you would with your own foundation.

At the end of the day, the type of foundation you choose depends on how hands-on you want to be, how much control you want over the money, and how you plan to fund it.

Key benefits of forming a nonprofit foundation

Forming a foundation isn’t just about giving back, it’s about building something that lasts. When you set one up the right way, it can keep supporting your cause long after you’ve stepped away. And there are some real, practical perks, too.

First off: tax benefits. When you create a 501(c)(3) foundation, donations to it can be tax deductible for your donors, and sometimes for you, too. That means people are more likely to give, and it can help you plan your own giving in a way that makes sense for your finances. Plus, foundations don’t pay federal income tax on most of the money they bring in, as long as it’s used for the mission.

There’s also the power of control and legacy. A foundation lets you choose exactly how the money is spent, who gets support, and what kind of impact you want to make. If it’s a family foundation, it can even be a way to bring generations together around a shared purpose. Yes, you can hire or include a family member on the board, just make sure everything’s handled properly and stays mission-focused.

And finally: consistency. When you’ve got a structure in place, it’s easier to plan for the long run. Whether you're funding programs year-round or giving out grants once a year, a foundation gives you the tools to be strategic, not just reactive.

So while it takes a little work up front, the payoff is a mission that’s built to grow, evolve, and keep making change.

Step-by-step guide: How to form a nonprofit foundation

Starting a foundation might sound like a mountain to climb, but when you break it down, it’s really just a series of steps. You don’t need to know everything up front, you just need to take it one step at a time. Here’s how it usually goes:

Step 1: Clarify your mission and goals

Start with your "why." What problem are you trying to solve? Who do you want to help? This is more than a formality, it’s the heart of your foundation. A clear mission helps you stay focused, raise money, and show the IRS that your work is for the public good.

Pro tip: Keep it short, but specific. Think about the kind of impact you want to see in a year, in five years, and even longer.

Step 2: Choose your foundation structure

You’ve got two main options: a trust or a nonprofit corporation. A trust is usually simpler but offers less flexibility. A nonprofit corporation gives you more legal protection and is often better if you’re planning to grow or work with a board.

Keep in mind, state law plays a role here, so depending on where you live, the setup might look a little different. When in doubt, it’s a good idea to check your state’s rules (or talk to someone who knows them).

Step 3: Assemble your board of directors

You’ll need a board to run your foundation. Most states require at least three people, and some states have rules about who can be related. So yes, your foundation can include a family member, but it shouldn't just be your family. A balanced board helps avoid conflict and builds trust.

Your board will guide big decisions, help with planning, and make sure your foundation stays aligned with its mission.

Step 4: Draft your organizing documents

This is where things start to feel official. You’ll need to write up your articles of incorporation, this is a basic legal doc that says who you are, what you do, and where you’re located. It’s filed with your state and is required to become a recognized nonprofit.

You’ll also need bylaws. These are your internal rules, things like how board members are chosen, how meetings work, and what happens if someone steps down. Think of it as the manual for how your foundation operates behind the scenes.

Every state has its own requirements, so you’ll want to double-check your local rules before you file.

Step 5: Apply for an employer identification number (EIN)

Even if you won’t have employees right away, your foundation still needs an EIN, basically, a Social Security number for your nonprofit. You’ll use it to open a bank account, file taxes, and apply for your 501(c)(3) status.

The good news? It’s free, and you can get it straight from the IRS website in just a few minutes. It’s one of the easier wins in the whole process.

Step 6: File for federal tax-exempt status

This is a big one. If you want your foundation to be recognized as a 501(c)(3) tax-exempt organization, you’ll need to apply through the IRS. Most foundations do this using Form 1023, the full version, or Form 1023-EZ, which is a shorter, easier version for smaller nonprofits.

The form asks for details about your foundation’s mission, finances, board, and how you’ll use donations. It takes some time, but once approved, your foundation won’t pay federal income tax on most of its revenue, and donors can usually write off their gifts as tax deductible.

This step can feel overwhelming, especially the first time. Many people bring in a lawyer, accountant, or financial advisor here, and it’s totally okay to ask for help. Getting this part right is what makes everything else run smoothly.

Step 7: Apply for state-level exemptions and registrations

After you’ve filed with the IRS, you’ll probably need to register with your state, too. Every state’s a little different, but you might need to:

• Register as a charity before fundraising
• File for state tax exemption (so you don’t pay state income tax)
• Submit your organizing documents or IRS approval

This step is easy to miss, but skipping it could cause problems down the road. It’s worth checking your state requirements so you stay on the right track.

Step 8: Develop your financial and fundraising plan

Now that the paperwork’s in motion, it’s time to think about how you’ll actually fund your foundation, and how you’ll manage the money. Even if your foundation starts small, a basic budget is a must. It helps you plan, stay organized, and make decisions that support your mission.

You’ll also want to map out a fundraising strategy. Where will your support come from? Will you rely on grants, major donors, events, or even recurring donations? Having a plan makes your foundation more stable and gives your board, and potential funders, more confidence in what you’re building.

This is also the moment to consider bringing in a financial advisor, especially if you’re managing a large gift or endowment. Advisors can help with investments, compliance, and making sure your foundation is using its funds wisely.

Common mistakes to avoid when starting a foundation

Even with a clear roadmap, there are a few places where new foundations tend to trip up. Knowing these ahead of time can save you stress (and money) later on.

Mistake 1: Rushing through the paperwork.
The legal side of forming a foundation might not be exciting, but it matters. Filing the wrong form, skipping a required step, or forgetting something like your bylaws can cause delays, extra costs, or even lead to your application being denied. Take your time here. Double-check everything.

Mistake 2: Building a board that’s all friends or family.
It might seem easier to pick people you already know, but foundations work best when the board brings a mix of skills, perspectives, and experience. Plus, having only family members can raise red flags with the IRS. It’s totally fine to include a family member, just aim for balance.

Mistake 3: Forgetting about state requirements.
A lot of people focus on the IRS process and miss the fact that their state may have its own rules, like registration for fundraising or annual filings. Skipping these can cause legal trouble or make you lose your tax-exempt status. It’s not just federal, you’ve got to cover state rules, too.

Mistake 4: Treating finances casually.
Mixing personal and foundation money, missing tax deadlines, or failing to track how donations are used can hurt your credibility and cause real issues down the line. Even if you’re small, act like a real organization from the start. Clean records = trust and long-term success.

Avoiding these pitfalls helps set your foundation up for growth, stability, and impact right from the start.

Beyond formation: What comes next?

Once your foundation is officially set up, the work shifts from building to running, and that’s where the impact really starts. But it’s not just about handing out grants or hosting events. There’s some behind-the-scenes work you’ll need to keep up with, too.

Keep up with annual filings.
Most foundations need to file a tax return each year, usually Form 990-PF for private foundations. Even if you didn’t bring in a lot of money, skipping this step can put your tax-exempt status at risk. It's one of those "non-negotiables" you’ll want to get in the habit of doing on time.

Set clear goals and track your progress.
Just like any mission-driven organization, your foundation should have a plan. Whether you’re giving out grants or running programs, take time each year to check in on what’s working and what’s not. Metrics matter, even if they’re simple.

Make the most of your tools.
You don’t have to do everything manually. Platforms like Harness can help automate donor communications, track giving, and make your foundation look more professional (without needing a full team). It’s the kind of support that gives you back time to focus on your mission.

Bottom line? Starting a foundation is only the first step. The real work, and the real reward, is building something that lasts and continues to grow.

Your foundation, your future

Starting a nonprofit foundation might seem overwhelming at first, but it’s completely doable when you take it step by step. From choosing the right structure to staying compliant with both state and federal rules, getting those early details right sets the stage for long-term success.

A strong foundation begins with clarity, your mission, your board, and a financial plan you can manage. But what really keeps it going is long-term strategy: tracking progress, staying organized, and growing your support over time.

That’s where an all-in-one solution like Harness makes a difference. As one of the most trusted donation platforms for nonprofits, Harness combines fundraising tools, donor communication, CRM, campaign tracking, and expert support in one place, so you’re not juggling multiple systems or figuring it out alone.

Whether you’re just launching or already up and running, Harness is built to grow with you, offering both the tech and the team to help your foundation thrive.

Frequently asked questions

How much money do you need to start a foundation?
There’s no set amount, but private foundations typically start with at least $250,000 to $500,000 to make the setup and maintenance worth it. Smaller foundations can work too, it just depends on your goals and how much support you want to provide.

Can a foundation pay board members or family members?
Yes, but it has to be reasonable and clearly tied to actual work done. The IRS pays close attention to this, especially when it involves family. It's important to document everything and avoid conflicts of interest.

What is the difference between a 501(c)(3) and a private foundation?
All private foundations fall under the 501(c)(3) category, but they operate differently than public charities. Private foundations are often funded by a single source and focus on grantmaking, while public charities tend to get funding from many sources and often run programs directly.

What is Form 1023 and when should I use it?
Form 1023 is the IRS application for tax-exempt status. Use it if you’re starting a foundation and want to be recognized as a 501(c)(3). Smaller organizations may qualify to use Form 1023-EZ, which is a shorter, simpler version.

How long does it take to get tax-exempt status?
It depends. If you file Form 1023-EZ and everything’s in order, it could take a few weeks. The full Form 1023 can take several months, sometimes longer if the IRS has follow-up questions.

Do I need a lawyer or financial advisor to form a foundation?
Not always, but it’s helpful, especially during the setup process. A lawyer can help with your legal documents, and a financial advisor can guide your budgeting and investment plans.

What are the ongoing reporting requirements for foundations?
Most private foundations file Form 990-PF each year with the IRS. You may also need to register or file reports with your state. Keeping clean, timely records is key to staying compliant.