For those who are unfamiliar with the ins and outs of 501 c(3) non-profit organizations, the terms, public charity and private foundation might seem like the same thing. However, upon close examination, there are several differences between the two that are worth knowing about.
The IRS defines a public charity using the following criteria:
- Churches, hospitals, qualified medical research organizations affiliated with hospitals, schools, colleges, and universities.
- Have an active program of fundraising and receive contributions from many sources, including the general public, governmental agencies, corporations, private foundations or other public charities.
- Receive income from the conduct of activities in furtherance of the organization’s exempt purposes.
- Actively function in a supporting relationship to one or more existing public charities.
Public charities are notable in that the donations they receive are fully tax exempt. For public charities, donations typically serve as the primary source of capital, but they may receive funding in other areas as mentioned above. As the name suggests, public charities also interact with and give back to the general public more frequently than private foundations.
A private foundation is different in that it typically has a single major source of funding, typically gifts from a single family or corporation. While private foundation contributions are tax-deductible, they usually do not accept donations. Per the IRS private foundations, are subject to excise taxes and penalties for self-dealing, making risky investments, and for failing to distribute adequate funds to charitable endeavors.
There are two common types of private foundations — a private nonoperating foundation and private operating foundation. The main difference between the two is that the former distributes its incomes to other foundations, while the latter distributes its income to its own charitable programs.
It is also worth noting that the term “foundation” is mistakenly understood as a legally-binding term, when it is, in fact, simply a conventional term.
Converting a public charity into a private foundation (or vice versa) can provide ample benefits depending on the goals of our 501c(3) organization, including better alignment with achieving your mission as a non-profit.