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Public Charity vs. Private Foundation

Private Vs Public

When starting a 501(c)(3) organization, there are generally two choices of how the organization will be classified. It can be a public charity or a private foundation. Though greatly outnumbered by public charities, private foundations bring a lot to the table.  Many people have a layman’s understanding of the difference between public charities and private foundations:  Public charities are understood to perform charitable work, while private foundations support the work of public charities.  That grassroots definition is, in practice, mostly true.  The specifics, however, are slightly more complicated. Let’s take a closer look at the differences, and similarities, between these classifications:

Public charities. Public charities represent the largest share of active, 501(c)(3) organizations.  Those starting a new organization usually prefer public charity status, not just because it better describes the organization’s purpose. Public charities also enjoy some advantages over private foundations:  higher donor tax-deductible giving limits and the ability to attract support from other public charities and private foundations.  Also, public charities have 3 possible tax filing requirements, depending upon annual revenue (listed in order of complexity):  Form 990 (> $200,000), Form 990-EZ ($50,000 – $200,000), and Form 990-N e-postcard (<$50,000).  All private foundations, regardless of revenue, must file Form 990-PF each year.  It is a lengthy and complex return much like Form 990 for public charities. It should also be pointed out that an applicant for 501(c)(3) status must prove why it should be considered a public charity, lest they be considered a private foundation by default.

Like the layman’s definition, public charities typically carry out some type of direct, charitable activity.  Examples include churches, private schools, homeless shelters, etc…the list of possibilities is nearly endless.  The true definition of a public charity, though, goes well beyond the programs and into the realm of structure and revenue source.  As for structure, in order to qualify for (and keep) public charity status, a 501(c)(3) must be organized for exclusively 501(c)(3) purposes.  The IRS requires certain language to be in a public charity’s articles of incorporation explicitly restricting its activities to such.  In addition, a public charity must represent the public interest by having a diversified board of directors.  More than 50% of the board must be unrelated by blood, marriage or outside business co-ownership and not be compensated as employees of the organization.  We are often asked where that is in the “code” and, frankly, it isn’t there…at least not verbatim.  It is an extrapolation of the IRS’s requirement that governance of a public charity be at arms-length and without private benefit (inurement) to insiders. You can read more about that here.  As such, the IRS requires that a quorum of board members be possible who have no personal stake, either directly or potentially through relationship.  Finally comes the income, or source of revenue, test.  Public charities must be supported by the general public.  For that to be true, a significant amount of revenue, at least 33%, must come from relatively small donors (those who give less than 2% of the organization’s income), from other public charities or the government.  While that is significant, that leaves 67% to potentially come from other, less diverse sources.

Private foundations. While being considered a private foundation could simply be a fall-back position of not qualifying for public charity status via either the organizational or income test (or both), it is most often a choice that is made.  There are reasons why someone would choose foundation status over public charity.  Chief among those is control.  In exchange for somewhat disadvantaged deductibility limits to donors, mandatory Form 990-PF filings, and minimum annual asset distributions (5% each year), private foundations can be controlled by related parties and be funded by a relatively small group…even one individual or family (think Bill and Melinda Gates Foundation).  This is often more than enough tradeoff for those starting a foundation.  Another significant reason may simply be operational. If the organization has as its primary purpose the financial support of public charities, as opposed to operating a particular program, a private foundation is likely more appropriate.

There is even a third type of 501(c)(3), the private operating foundation.  This is best thought of as a hybrid of the other two, most often a private foundation with direct program services like that operated by public charities.  The rules are strict, as control can be like that of private foundations, but with some of the benefits of public charities.  There are relatively few of these organizations around.  You typically only see these under rather unique circumstances.

There really is no right way to go between operating as a public charity or a private foundation.  It completely depends on each organization’s programs, plans and intentions.

Greg McRay, EA

Greg McRay is the founder and CEO of The Foundation Group. He is registered with the IRS as an Enrolled Agent and specializes in 501(c)(3) and other tax exemption issues.

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Kila Ward
Guest

Is the private foundation like an irrevocable trust? I’m interested in trusts and would like to know more. Are charitable trusts and public charities the same thing?

Linda L
Guest

For a Private Foundation, what are the disadvantages of deductibility limits to donors

Hector Alvarez
Guest
We are forming a non profit and are looking for assistance in the kind of non profit to begin. We will be conducting various services that are specifically targeted for the community and townships we assist, but want to know if the Private Foundation is the way to go. The main reason we need the 501(c)3 is for the Grants we need to make the programs work as well as to qualify for a lot of the government assistance we seek. Also we will be getting donations and need to provide the write off for our donors. My concern is… Read more »
Fred
Guest

Are there reporting advantages, from the non-profit organization’s perspective, to being a public charity instead of a private foundation? Specifically, do you have to supply more information (or different types) if you are a private foundation? Thank you.

Fred
Guest

I should clarify — assume that the non-profit receives less than 25K and can file a 990-EZ. Thanks.

JehovahsTool
Guest
We are considering establishing several ventures and of the few a second hand (educational workshop) shop/store in addition to a new church. These entities would give and help generate proceeds to our church of which I am the founder. Which organizational outline would be best for the business’, ventures and the church of the 501(c)3’s Public charity, Private foundation, or a private operating foundation. Would the charity purpose change to that of a 501(c)4, 501(c)6, 501(c)7… I am trying to be careful as well as cautious with all of the new State and IRS changes for churches and non-profit charities… Read more »
Barby
Guest
We are looking to start a developmental center that provides educational programs (a school), mental health counseling, and related therapies for children with disabilities and their families. We are currently filling out our 1023 form, but are unsure how to proceed. The building we are currently using is fine for now, but we want to be in a new building (specifically built/contracted for us) in 3-5 years. Should we include the plans for a new building in our forms and just file as a foundation? Or should we remain filing as a public charity and just create a foundation later… Read more »
Kim Luke
Guest

A family member who was not employed or insured has been recently diagnosed with stage 3 cancer. We are looking into doing a private foundation, but don’t know if this would qualify being that it would only benefit one person. Also, would we qualify for government grants?

James
Guest
Over 100 years ago, our organziation was formed with the sole purpose to support the efforts of our church, but legally organized and as separate entity from the church’s incorporation. Rarely have there been any new funds / gifts to the organization. It’s primary source of income is investments, dividend, capital gains and interest and except for audit fees and banking fees, all the income and more is paid to the church for its operations. We have always considered ourselves a “supporting organization” and a charitable organization under the church, but confused as to the income test and wonder if… Read more »
Kris
Guest

Hi Greg

My father passed last Fall. What made the event less painful for all was the amazing hospice care and facility he spent his last days in. I was thinking of setting up a foundation, along the lines of the Susan G Komen Breast Cancer Foundation to support hospice care. I am just a lowly American Citizen chasing the dream…..is this a major undertaking? Would I need to put in up front costs? I have absolutely no clue and would appreciate any direction. Many thanks

Kyle
Guest

Regarding ‘public support’
If a nonprofit receives donations of widgets (which the donor would otherwise discard) from relatively few donors and sells them to the general public (at a price for which the donor could never have sold them, even at the beginning of their usable lifetime), can we consider the public our source of actual monetary support, becoming a public charity?
Thanks
Note: The organisation in question does not operate programs itself, but donates to charitable causes.

Pam R.
Guest

Does an individual get a tax write off for giving to their own public foundation?

Charlene Ervin
Guest

Our foundation has been of public status for several years. Now, due to income from investments we are told we must change status. My question is that our accountant said if 2/3 of your funds come from investment income you cannot be a public charity/foundation. An article I just read from you says 33&?
Also, can a public foundation use all their funds to provide scholarships?

Scott R
Guest

My wife has formed a public charity in KS to support animal rescue. We own property in OR that we wish to donate to the charity, which it can convert to cash. Part of the reason for donating is that there are OR taxes that out-of-state owners pay on property sales that are not required of charities. Given the 33% rule, can I donate the property through another charity to the charity founded by my wife and avoid the spike in private donations?

Timothy
Guest

Can a church be recognized as a church without becoming a 501c3 organization?
The IRS recognizes a “church” as a public charity. Can a “church” be a Private Foundation?

Tim
Guest
If a Church puts the following paragraph in it’s Articles of Incorporation, does that mean it is a 501c3 organization? “Upon the winding up or dissolution of this corporation, after paying or adequately providing for the debts and obligations of the corporation, the remaining assets shall be distributed to a nonprofit fund, foundation or corporation, which is organized and operated exclusively for charitable, educational, and/or scientific purposes and which has established IRS tax exempt status under Section 501/c (3) of the Internal Revenue Code. If this corporation holds any assets in trust, such assets shall be disposed of in such… Read more »
Tim
Guest

I have another question.
The organization that I’ve mentioned above, has that paragraph in it’s Articles of Incorporation, and Bylaws. But nothing else that refers to 501c3. Only that Paragraph. If this Church was established and recognized as a church by the IRS before 1954(it was established in 1947), can it still be tax exempt without 501c3, if it proved it was an established church before then?
The Above mentioned paragraph was added in 1968. But the rest of the documents never mentions 501c3.

Tim
Guest

Thank you Mr. McRay for your answer! That really cleared some things up for me. I’m sorry if I’m asking too many questions. But I do have another one if you have the time. Can a church be incorporated under a Corporate Sole? Thanks again for your answers. They are helping me out a lot!

Timothy
Guest

What would happen if a Church that was by default a 501c3 organization and turned around and put it under “Corporate Sole”?

Jim
Guest

Can a director make a loan to the nonprofit corporation he serves to help get a project off the ground?

Tim
Guest

Can a Non-profit Religious Corporation become “tax exempt” because a “Church” runs it?
Does the Church make the Corporation “tax exempt”?

Lila
Guest
My husband, who is semi-retired psychotherapist/teacher and I have been considering starting a non-profit to provide free therapeutic services to assist communities dealing with family issues. He is keen to oversee the entire operation including initial funding, so I’m thinking we would likely go the private foundation route. We would need a facility to house the services and simultaneously we have been thinking about changing our residence. It would be ideal to live and run the foundation from the same property. If we are lucky to find such a property and purchase it, is it possible to allocate a portion… Read more »
Lila
Guest

Just to add, perhaps the more immediate question is could we get an immediate tax deduction for the property that we allocate/”give” to the foundation? or would it be easier and more dollar-effective to fund foundation with cash then have the foundation pay us rent for using the facility?

Zach
Guest
I hope you’re still answering questions! A friend of mine is a government contractor. He is starting his own business and wants to donate 10% of his profit to Christian missions, both local and global. He’s asked me to organize a non-profit to work alongside his for-profit. So the purpose of my new non-profit will be to ensure his 10% goes to support missionaries around the world as well as local needs. He’s also going to provide all his employees with $4000 and/or 2 weeks to go on mission trips and donate to the non-profit approved ministries. We would accept… Read more »
lissa
Guest

do 501 (c) 3 nonprofit public foundations need to seek IRS approval to award scholarships?

Dan Rice
Guest

An additional charitable entity option might be to contact a cooperative public charity and ask them to set up a charity owned, single member limited liability company for the donor. The public charity could also consider appointing the donor to serve as the managing manager of the LLC. See IRS Notice 2012-52, issued July 31, 2012, for more information.

Juanita Segura
Guest

Hi Greg I wanted to start an organization. I was diagnosed with lung cancer in November of 2014, I’m not cancer free yet but I’ve been blessed financially and many are not. So I wanted to create an organization have events and give to lung cancer patients that can use the monetary help. What will be best public or private?

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