To prevent a private foundation and its insiders from being able to control a business enterprise, the IRS limits the amount of stock the foundation and its disqualified persons can hold.

The general rule limits the collective ownership levels of the foundation and its insiders to 20% of the voting stock of a business enterprise. Foundations that exceed the limit are subject to a 10% penalty on the value of the excess holdings. These rules, with minor changes, also apply to business enterprises organized as partnerships, trusts, and unincorporated associations. These rules do not apply to passively held investments.

The EBH rules do not apply if the foundation itself does not hold, directly or indirectly, more than a 2% interest (by vote and value) of the business enterprise.

Foundation Source works with its clients to help them understand the many nuances and exceptions to the EBH rules, so they don’t run afoul of IRS regulations.