An Overview of Private Foundations vs. Public Charities

The Internal Revenue Service (IRS) has made it possible for tax-exempt charity organizations to be established. These organizations can take one of two forms: private foundations or public charities.

Public Charities vs. Private Foundations The IRS classifies private foundations and public charities as 501(c)(3) entities that are tax-exempt. Both exist to benefit the general people. Private foundations and public charities, on the other hand, have various ways of carrying out and supporting their missions, as well as regulating themselves. Make grants first and foremost. No. While some public charities can and do give grants, they are more commonly known for their philanthropic activities and services. Yes. Although private foundations may perform their own philanthropic operations, they primarily provide grants (i.e., give money) to public charities.

The majority of their funding comes from the common population.

Yes. Public charities obtain funding through collecting gifts and/or grants from the general public (i.e., individuals, governments, corporations, and private foundations). No. Private foundations often receive all of its funding from a single person, family, or business.

It is necessary to demonstrate that the majority of money comes from public sources. Yes. The IRS requires public charities to show that they get sufficient assistance from the general public in order to keep their tax status. No. Being self-funded is advantageous because it allows foundations to sidestep the IRS tests that public organizations must pass. Private foundations do not often engage in fundraising, despite the fact that they are not forbidden from doing so.

The Advantages of a Private Foundation

If you want to help a worthwhile cause, writing a check is the simplest way to do so. So, why do tens of thousands of people bother to set up and run private foundations?

The First Steps to Laying the Groundwork

First, determine the goal of your private foundation and the parameters by which it will make contributions. This definition will govern the activities of your organization and is required in order to obtain tax-exempt status.

Private foundations are divided into two categories: Foundations that are not in operation and Foundations in Action

The primary difference between non-operating and operating foundations is the extent to which a foundation's resources and operations are dedicated directly to charitable activities and services, as well as whether such operations are carried out regularly or intermittently.

Non-Operating Foundations often provide donations to public charities

They can run their own direct charitable activities (such as making gifts to individuals, awarding scholarships, making grants to international groups that aren't registered as 501(c)(3) charities, and so on), but it isn't their primary focus. In general, a non-operating foundation must provide an annual distribution equivalent to about 5% of its average net investment assets from the previous year. Grants to charities, certain related expenses, and, with the exception of investing charges, necessary and reasonable administration costs (including Foundation Source's yearly fee) also count toward this requirement. These are the types of foundations that Foundation Source helps to form and support.

An operating foundation primarily engages in philanthropic operations and is required to be actively involved in its own projects on a long-term basis.

(The operation of a museum, zoo, library, or research facility are examples.) Operating foundations are required to spend the majority of their investment revenue (85 percent) on the active conduct of their charitable operations each year to ensure that they are appropriately engaged in directly carrying out their philanthropic activities (direct charitable expenditures). An operating foundation, rather than making gifts to other organizations, makes direct charity expenditures by performing its own charitable operations. (For example, instead of giving a gift to a food bank, an operating foundation would buy food and hire a driver to distribute it.)

Because private foundations are formed for charitable purposes, they must go by IRS regulations to guarantee that they are active and that their expenditures benefit the general public.

A private foundation must make an annual distribution of about 5% of its average net investment assets from the previous year.

  • Grants to charities, certain related expenses, and, with the exception of investing charges, necessary and reasonable administration costs (including Foundation Source's yearly fee) also count toward this requirement.

  • Donors to private foundations get complete control over how the foundation's charitable assets are invested and distributed in exchange for adhering to certain rules (and pass this control to subsequent generations in perpetuity). They are also eligible for substantial tax breaks.

  • When a donor makes a gift to a private foundation, he or she may be able to take advantage of three key tax benefits: 1. For each year in which a contribution is made, the donor's income tax is reduced; 2. Capital gains tax exemption based on the features of the property donated; and 3. Potential estate taxes are reduced or eliminated.