Posted by Alicia Waltenberger.
A few years back, I had a couple of clients, a husband and wife, who needed my help starting a theater company. Although my job title includes the word “Director,” it wasn’t my directing skills they were seeking. Instead, they wanted to register themselves as a Section 501(c)(3) charitable organization—with all the favorable tax treatment that entails. They had a theatrical background and a vision for bringing live performances to out-of-the-way communities.
People don’t put together community theater companies in order to make big bucks—they want to entertain and edify new audiences doing what they love. Margins tend to be tight, and a tax break can make all the difference between staying afloat and going under. Venues, costumes and stage equipment all cost money—my actors-turned-charity-founders were already relying on donations from arts-loving patrons to keep their show on the road.
Under IRS code 501(c)(3), charitable organizations are divided into two types: 1) Public charities (think American Heart Association, Food for the Poor, etc.) or 2) private foundations—perhaps the best-known being the Bill & Melinda Gates Foundation, another charity-minded married couple. While public charities rely on donations, private foundations are usually funded by the individual or family giving birth to and naming the foundation.
The Bill & Melinda Gates Foundation is a non-operating private foundation—it grants money to outside programs, often run by public charities. In 2018, they funded programs for Save the Children and Habitat for Humanity, to name just two. Most of the clients whom I’ve helped to create a private foundation were looking to fund a select cause and wished to do so over a period of years. Registering as a private non-operating foundation allowed them not only to receive a tax break, but also to create a legacy of giving—by encouraging their loved ones to continue supporting their given cause after they passed away.
While non-operating private foundations grant money to outside charities, my theater troupe planned to distribute funds to its own programs—putting on plays. Running an operating foundation involves a lot of legwork—in this case, all the hard work of staging a show and raising money to keep the show going. An operating foundation is any private foundation that spends at least 85% of its adjusted net income or its minimum investment return, whichever is less, directly for its own charitable purposes each year. Actor salaries, equipment and venue rental costs all counted, since their ultimate purpose was to bring arts and culture to under-served communities.
So you want to start your own foundation? Five quick questions.
- How much do you have? Unless you’re starting with at least a million dollars, a donor-advised fund may be more suitable. Starting a theater group is an unusual case; most people don’t go the route of a private foundation, when looking to establish a charity fund. DAFs are usually free to set up, with low annual fees, and they allow you to make grants to existing public charities and private foundations. Also, you can deduct your cash contributions to a DAF, up to 60% of your gross adjusted income (whereas cash contributions to your own private foundation are tax deductible up to 30% of AGI). Unlike private foundations, all the funds in your DAF may be left to grow indefinitely—there’s no annual distribution requirement.
- What good will it do? Sit down and think about your vision. It’s possible that a charity already exists, adequately covering the area in which you hope to make a difference. Is there a real need for your foundation? My theater troupe was hoping to do something that nobody else was doing: Bringing theater to communities where no other theater company were putting on productions.
- What’s your business plan? As well as a clear mission statement, you’ll need to develop a business plan. That means balancing all projected expenses, including startup costs, against all the income you expect your foundation to receive in the first year.
- Who’s on board? Decide who the decision-makers are; select an advisory board. For an active nonprofit that’s typically 3-5 people—often, close family members. If the foundation is a family affair, it’s likely you will name it after yourselves, as did Bill and Melinda Gates.
- Is it tax-exempt? Once you’ve established your mission, and sure your foundation is economically viable, you’ll need to get an attorney on board to help you complete the necessary paperwork to gain charitable status. Completing the entire form can take 100 hours. Once completed, you will then need to wait several months while the IRS processes the application.
Three years after becoming a private foundation, the community theater is still going strong. For them, all the time and money spent was ultimately worth it. You too, may decide that a private foundation is a worthwhile way for you or your family to make a real difference and leave a lasting legacy.