So you want to start a non-profit organization. Is it going to be a Public Charity or a Private Foundation? The following are the main differences between the two types of organizations:
Public charities generally receive a greater portion of their financial support from the general public or governmental units, and have greater interaction with the public.
At least 33% of a public charity’s annual support must come in the form of small donations from members of the general public. The IRS, however, will not require an organization to prove this 33% in its first five years. After five years, if a nonprofit does not meet this 33% benchmark the IRS will automatically convert the public charity into a private foundation.
Contributions to charitable organizations may be deducted up to 50% of adjusted gross income computed without regard to net operating loss carrybacks.
Should have a diverse Board that includes non-family members.
The Board of Directors determine the course of the non-profit.
The principal advantage of a private foundation is that it provides a vehicle for the individuals establishing the foundation to make a tax deductible charitable contribution and retain significant control over the foundation’s charitable giving program.
Other advantages of a private foundation include the opportunity to involve family members in philanthropic projects and flexibility in charitable giving. Contributions to private foundations are limited to 30 % of adjusted gross income computed without regard to net operating loss carrybacks.
PFs are typically controlled by members of a family or by a small group of individuals, and derives much of its support from a small number of sources and from investment income. They invest their principal funding, then distribute the income from investments for charitable purposes.
PFs are less open to public scrutiny, private foundations are subject to various operating restrictions and to excise taxes for failure to comply with those restrictions.
Private foundations must pay an annual 2% tax on its net investment income (income from investment assets such as shares, bonds, and mutual funds), and must distribute at least 5% of its investment assets for charitable and administrative purposes, or otherwise pay an excise tax on undistributed income.
They cannot do business with their major contributors, they are subject to excise taxes and can face penalties for self-dealing, making risky investments, etc.
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