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The most common type of private foundation is a grant-making foundation. These foundations typically provide grants to charities to fund expenses or programs.

To establish a private foundation, first define its purpose and its guidelines for making grants. Then decide whether to structure it as a charitable trust or a nonprofit corporation. A trust can be easier to establish and operate, but may offer less legal protection than a nonprofit corporation. Nonprofits have stricter operating requirements, but they limit personal liability and have more flexibility with funds.

A private foundation’s activities must benefit the public in order for it to maintain its tax-exempt status. Running one is like running a business, requiring thorough records, tax returns, and skilled employees.

Private foundations must apply for an employer identification number and file organizing documents with the IRS. And they must file the paperwork needed to obtain in-state tax-exempt status.

Private foundations must avoid letting individual organizations accrue too many benefits.  They cannot let insiders accrue too many assets or too much income, and they cannot participate in political campaigns. They must limit their dealing with disqualified persons, such as big contributors. Their investments cannot jeopardize their exempt purposes, and they cannot try to influence legislation through spending or lobbying.

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