Can I set up a corporate foundation for my company?

Summary:

There are lots of things to worry about.

Someone wrote on June 28, 2001, to CharityLaw (a service of http://www.charitychannel.com) to ask for guidance on setting up a new foundation:
I want to form an organization that will be
directly doing religious / charitable work within local communities by
facilitating other organizations' charitable work through the use of
technology. Just had a question as to the type of foundation I should file as. If I
understand all of this correctly, then I should file my 501(c)(3) paperwork
as an 'operating foundation'.

The foundation will be very closely tied to my company, its first donor. Is
there anything that I should be careful of? I know that I would be a
"disqualified person", but how does that affect the way that I can operate
and whether or not I can receive compensation for my activities (a small
salary)?

Barnaby Zall responded from his law office in Rockville, MD:
Bells ring. Alarms sound. Lights flash.

Your question raises LOTS of red flag issues. Why is it you want to be a
foundation at all? What is the relationship between you and your exempt
organization, and your company? Do you know what the operating and disclosure
requirements are for private foundations? Did you know that the IRS collected
$83 million in excess benefit transaction taxes last year, with lots more in
the pipeline?

This sounds like you're trying to do something very complicated on your own.
Your best bet would be to get some experienced help first. Try a local
association of nonprofit organizations. In many states, these organizations offer
competent counseling for minimal cost (a basic seminar on applying for (c)(3)
status from Maryland Association of Nonprofit Organizations is $50). They
might also convince you that the way you want to go is to utilize an existing
(c)(3) vehicle, like the United Way, rather than reinventing the wheel.

(For a list of state associations of nonprofits, see http://www.ncna.org/. For a slightly broader list of state-by-state resources, see the FAQ items listed at http://www.idealist.org/en/faqcat/96-23 .)
Having said that, it may be that having your (c)(3) "closely tied to your
company" is a bad idea. Even corporate foundations (a very common way to go)
are independent entities, run by boards of employees who, in theory, can make
independent decisions that may not be in the best interests of the company.
Having done corporate foundations, it can get tricky. The key is to show
overwhelming evidence of unmet need, specific remedies obviously likely to
succeed, independence in the exempt organization, and any benefit going totally to the public,
even if it hurts the company. Otherwise, under intermediate sanctions, there is
risk for the organization, the company and the managers (for example, can you say "personal
tax liability up to $10,000"?).

You would be a disqualified person (founder, ED). Any compensation you
receive would have to go through a complete intermediate sanctions review. To
avoid managers' tax (see $10,000 personal liability noted above), you would
need a reasoned opinion of counsel.

(Note: For more about intermediate sanctions, see http://www.nonprofits.org/npofaq/18/13.html.)
This can all be done, and the world may be a better place as a result of your
actions. But wouldn't you feel better if someone who knows the law were to
check your plans in advance?

In a later post, Barnaby Zall continued:
Yes, this can all be done. It must be done in a way that benefits the public,
with only incidental benefit to individuals or private entities (incidental
benefit here means that the overall public benefit cannot be provided without
providing some benefit to the private interests as well).

Otherwise, how is
this different from a for-profit technical advice business whose market
efforts are directed at ministries? This does not mean just having a
charitable heart (though I'm sure you have that); it does mean convincing the
IRS that both your organization and your operations are forever dedicated to
the public good, and not private gain.

The usual way this is done is to establish the nonprofit, and then have the
for-profit as a subsidiary. Other methods involve joint ventures with
for-profits. In each case there are specific and complicated rules. But every
rule has at its core the requirement that the public benefit be paramount and
the private benefit incidental.