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Other thoughts on nonprofit avoiding private foundation limitations?

Your Legal Questions Answered

Other thoughts on nonprofit avoiding private foundation limitations?

I want to create a nonprofit whose business model is to grow through investing in public securities, primarily stocks. Donors would give to the nonprofit, the nonprofit would invest the money, and use a percentage of the profits for grants to other charities. I'm not sure a private foundation is the answer because of the 5% distribution requirement and investment income tax.  I'm 23, active duty military, and am probably worth no more than a Big Mac. I know I will have to begin by getting public support but I want to maximize growth and be completely from fundraising for the long term. Could I use a 509(a)(3) supporting organization?  Any other suggestions?

This is another variation on a question about avoiding private foundation limitations that we have received recently.  (See Your Legal Questions Answered:  How do we avoid 5% private foundation distribution requirement?). Since you are starting from scratch and are not already classified as a private foundation, you have more flexibility in your approach.

You could start a small 501(c)(3) public charity and a 509(a)(1) Type I supporting organization at the same time.  (See Ready Reference Page: “Supporting Organizations Qualify as Public Charities”)  Since the supporting organization has no public support requirement, you could grow the assets inside the supporting organization without having to raise additional funds to offset the investment income that would fall in the denominator of the fraction if everything were in the same public charity.  (See Ready Reference Page: “Calculating Public Support Percentage”)  Your requirement to raise funds in the public charity could be relatively small.  I am not aware of any rule that says a supporting organization cannot have assets substantially in excess of the public charity that it supports.  The problem is that you will have to raise new money in the public charity perpetually and keep the organization alive as a public charity or you will lose your supporting organization status and become a private foundation.

As an alternative, you could start a 501(c)(4) social welfare organization with the ultimate charitable purpose you envision for your work.  The problem here is that contributions to (c)(4) organizations are not tax deductible as charitable contributions.  You are not likely to get donations from private foundations or donor advised funds.  But since only about 8% or all individual taxpayers itemize their deductions and can obtain any economic advantage from charitable gifts, you might be able to convince people to give to your (c)(4) for the program it conducts and not for the tax advantage they might receive.  A (c)(4) has no distribution requirement or investment income tax and can grow its assets as quickly as the stock market, your investment acumen and a lot of luck will allow.

Tuesday, June 25, 2024

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