Public Charity or a Private Foundation?

January 3, 2017

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 Charity

  • 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.

Private Foundation

  • 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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