Orthopaedic charitable foundations can offer great benefits
The formation of a 501(c)(3) tax-exempt private foundation is an interesting addition to an orthopaedic practice that can add value in several ways. For many orthopaedic surgeons, part of finding satisfaction in practice lies in giving back to the local community. Forming a foundation is a relatively simple and inexpensive process that can bring great benefits to orthopaedic practices.
The benefits of having a foundation associated with your practice include the following:
- Improving employee morale by involving them in the work of the foundation
- Engendering positive press for the practice by telling people about its community involvement
- Allowing earnings from charitable operations to be exempt from federal income tax
- Providing donors a means to make tax deductible
What’s a 501(c)(3)?
To be tax-exempt under section 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively for exempt purposes rather than for the benefit of private interests. Additionally, none of its earnings may “inure” to any private shareholder or individual, which essentially means that the organization cannot distribute its earnings or pay excessive compensation to certain shareholders and individuals. Finally, the organization may not attempt to influence legislation as a substantial part of its activities, and it may not participate in any campaign activity for or against political candidates.
A tax- exempt entity organized under section 501(c)(3) is either a public charity or a private foundation. A public charity generally derives its funding or support primarily from the general public, receiving grants from individuals, government, and private foundations. Some public charities engage in grantmaking activities, but most conduct direct service or other activities in furtherance of their tax-exempt purpose.
A private foundation, on the other hand, usually derives its funds from a single source, such as an individual, family, or corporation, and more often than not, makes grants. A private foundation does not solicit funds from the public. Aside from these structural differences, private foundation status generally provides donors more control over how the funds are spent and invested.
Forming a private foundation rather than a public charity does, however, impose additional restrictions. These include restrictions on self-dealing (transactions between the private foundation and its substantial contributors or other disqualified persons); requirements that the private foundation annually distribute income for charitable purposes; limits on its holdings in private businesses; provisions that investments must not jeopardize exempt purposes; and provisions to ensure that expenditures further exempt purposes.
My group formed a private foundation in 2001. We decided early on that all the work would be done on a volunteer basis. The foundation has no paid staff and a retired physician serves as the executive director. The mission statement of our charitable foundation is to promote active lifestyles for people of all ages and all abilities.
One of the foundation’s major activities is building all-abilities playgrounds in the metro Atlanta area, an idea we borrowed from the AAOS. We try to build one per year. We also have sponsored several other organizations that work with special needs children. We participate actively in projects sponsored by other foundations, such as the Arthritis Foundation, that have missions similar to ours.
One of our current projects, called PowerUp, is a coalition of groups working to reduce the incidence of childhood obesity. It has been amazing to see the synergy that occurs when several groups working on the same thing link up. Our primary fundraiser every year is a golf tournament, but we also accept donations from staff, patients, and friends.
You may think that forming a foundation is out of your reach if you are in a small group, but it is really quite straightforward and inexpensive. The process for forming an exempt entity under section 501(c)(3) is virtually the same for a public charity and a private foundation.
First, the entity should be formed under your state laws. In Georgia, where we are located, charitable corporations are formed under the Georgia Nonprofit Corporation Code and must file articles of incorporation with the Georgia Secretary of State. Several specific provisions must be included in these articles; these are outlined in the code. The entity should also adopt bylaws and a conflict of interest policy in accordance with the guidance provided by the Internal Revenue Service.
The organization must then apply for federal tax exemption by filing a Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. The filing must describe the governance structure, proposed compensation of employees, fundraising activities, proposed expenditures, and other items establishing that the foundation was organized and will operate for an exempt purpose. If the organization files this application within 15 months from the end of the month in which it was organized, the organization’s exemption will be recognized retroactively to the date it was organized.
All of us need to look for ways to make our practices more rewarding, and the ability to control the destiny of your charitable efforts is well worth considering.
D. Kay Kirkpatrick, MD, is copresident of Resurgens Orthopaedics in Atlanta. She can be reached at KirkpatrickDK@resurgens.com
John L. Brown, Esq., is an associate, and Sidney Welch, JD, MPH, is a partner, with Arnall Golden Gregory, LLP.
Note: The information contained in this article is intended for general information purposes and should not be considered legal or financial advice. Individuals who need legal or financial advice should contact a duly licensed professional.