A foundation is a charitable organization created to support a particular cause, community, or group of beneficiaries. Foundations may provide grants, scholarships, funding for programs, or operate charitable programs. A foundation is commonly organized as a nonprofit corporation under Minnesota Statutes Chapter 317A or, in some cases, as a charitable trust.
How a foundation is treated for federal tax purposes depends largely on how it is funded and operated. Organizations recognized under section 501(c)(3) of the Internal Revenue Code are generally classified as either public charities or private foundations. Public charities typically receive support from a broader group of donors, while private foundations are more often funded by an individual, family, or corporation.
Duluth offers several examples of how foundations can look in practice. One familiar example is the Young Athletes Foundation, which operates under Grandma’s Marathon. Created in 1990, the Young Athletes Foundation promotes healthy and active lifestyles for youth throughout northeastern Minnesota and northwestern Wisconsin. Its programs include youth running events, scholarships, a high school running shoe program, and grants supporting youth athletics. Since its creation, the Foundation has contributed more than $1.8 million to youth athletic, recreational, and nonprofit organizations in the region.
Another local example is the Boreal Waters Community Foundation, formerly known as the Duluth Superior Area Community Foundation. The organization began in 1982 and supports communities throughout northeastern Minnesota and northwestern Wisconsin through grants, scholarships, and charitable funds. Today, more than $117 million in assets are under its stewardship and more than $52 million in community grants have been awarded since its creation.
These organizations show that there is no single model for a foundation. Some operate programs directly, some make grants, and others manage charitable funds for donors. Those differences matter when deciding how a new foundation should be structured.
The first step in starting a foundation is identifying what the organization is intended to accomplish. Organizers should determine its charitable purpose, where its funding will come from, who will control it, and whether it will operate programs directly or fund programs operated by others. Those decisions can affect both the legal structure and whether the organization is classified federally as a public charity or private foundation.
If the foundation is organized as a Minnesota nonprofit corporation, the organizers generally begin by filing Articles of Incorporation with the Minnesota Secretary of State under Chapter 317A. An organization intending to seek 501(c)(3) status assure its governing documents meet federal requirements. It will typically adopt bylaws, appoint or elect a board of directors, obtain an Employer Identification Number, and establish a governance structure.
The organization can then apply to the IRS for recognition of federal tax exempt status, generally by filing Form 1023. State obligations may also apply. Charitable organizations that solicit donations in Minnesota are generally subject to registration and annual reporting requirements administered by the Minnesota Attorney General’s Office, although statutory exemptions exist.
The process may look somewhat different when an existing organization wants to create a foundation. An existing nonprofit does not need to form a new nonprofit corporation. If the goal is simply to dedicate resources to a particular charitable purpose, the nonprofit can establish a program or restricted fund within its existing structure. The Young Athletes Foundation, for example, operates as a charitable arm of Grandma’s Marathon Duluth, Inc. A separate entity may make more sense when distinct governance, finances, fundraising, or operations are wanted.
Creating a separate entity is often more important with a for profit corporation. If an independent charitable foundation is desired, then typically a separate nonprofit organization is created. If most or all of the funding comes from the sponsoring corporation, the organization may be classified as a private foundation for federal tax purposes.
Just as the structure matters when a foundation is created, it also matters when the foundation eventually comes to an end. Dissolving a nonprofit involves more than simply stopping operations. Under Minnesota law, dissolution of a nonprofit corporation generally begins with approval by the board and, when applicable, members with voting rights. The corporation then files a notice of intent to dissolve with the Minnesota Secretary of State. After that filing, the organization generally limits its activities to those necessary to wind up its affairs.
Additionally, a corporation that holds assets for charitable purposes or is exempt under section 501(c)(3) must notify the Minnesota Attorney General before dissolving. There is a 45 day waiting period before certain assets involved in the dissolution may be transferred, unless the Attorney General waives all or part of that period.
The organization must also determine what happens to any assets that remain after its debts and obligations are paid. If those assets were dedicated to a particular charitable purpose, they must continue to be used for that purpose rather than distributed to the individuals who created or operated the organization.
Foundations can be a meaningful way to turn charitable goals into lasting impact. Whether the focus is youth athletics, scholarships, or another local need, the right structure can help an organization carry out that mission effectively. Understanding how a foundation is formed, operated, and eventually dissolved can make the process feel much more manageable and ensure its charitable purpose is protected from beginning to end.
Haley Webb is an attorney with Fryberger, Buchanan, Smith & Frederick, P.A., practicing in the areas of Nonprofit and Tax-Exempt Entities, Real Estate and Estate Planning. This article is not intended to provide legal advice. You should always consult with an attorney about your specific circumstances.
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