The free-software-foundation was incorporated as a 501(c)(3) nonprofit organization on October 4, 1985. The founding gave the gnu-project's activities a legal home: the FSF could hold software copyrights (making it harder for individual contributors' estates or assignees to later restrict the software), accept tax-deductible donations from US contributors, and eventually employ developers to work on free software full-time.
The institutional structure solved a practical problem. stallman's work on GNU had initially been conducted as an individual, supported by donations and consulting fees. As the project grew and attracted contributors, it needed an entity that could receive assignments of copyright (so the GPL would have a clear rightsholder who could enforce it) and provide organizational continuity. The FSF's copyright assignment requirement — contributors to FSF projects must assign copyright to the FSF — became both a practical tool and a point of later controversy, as some developers objected to the asymmetry of assigning rights to a central organization.
The FSF also took on a publishing and educational role from the beginning. The sale of GNU software tapes (legally, you could sell copies; the freedom the GPL guaranteed was to redistribute, not to obtain for free) and later GNU Press publications funded the organization's operations. The FSF's stance that selling free software is entirely legitimate — and that the "free" in free software refers to freedom, not price — was articulated repeatedly in this period through stallman's writings and the gnu-manifesto.
The founding of the FSF institutionalized the founding-gnu-and-fsf-1983-1991 era's transformation of stallman's individual project into an organizational movement. The software-freedom-law-center, founded much later (2005) by eben-moglen, would handle legal enforcement; the software-freedom-conservancy, founded in 2006, would provide fiscal sponsorship for other free software projects. But the FSF remained the philosophical center of the free software movement that stallman had defined.