The Internal Revenue Service (IRS) broadly provides for two types of organizations with tax-exempt status under Internal Revenue Code (IRC) §501(c)(3): private foundations and public charities. The main difference between these two organizations is the degree to which their activities involve the public. However, there are other important distinctions between the two types of organizations.
If you have questions or concerns about operating requirements and any restrictions on your nonprofit corporation necessary to maintain its 501(c)(3) status, contact the California Center for Nonprofit Law at (949) 892-1221 today. Here are four ways to distinguish between private foundations and public charities.
- Financial Support
The funding for a private foundation typically comes from a small number of sources. In many cases, funding for a private foundation comes exclusively from a single family or corporation and/or from investment income from foundation assets.
Conversely, a great amount of a foundation’s financial support comes from ongoing donations from the public. Another large source of support is often from government funding.
- Control and Influence
A private foundation is typically controlled by family members or a small group of people. As a result, the public has little or no control or influence on how the foundation operates or the activities in which it chooses to participate.
On the other hand, a public foundation has much major greater interaction with the public. It often has a board of directors primarily composed of members of the public. Therefore, a larger group tends to influence or control the foundation’s direction and activities.
The primary activity of many private foundations is making grants to other charitable organizations and individuals operating certain types of charitable endeavors or programs. However, some private foundations are private operating foundations that may distribute funds to their own programs that they actively operate for charitable purposes. Examples of private operating foundations include museums and zoos.
A public charity often is directly involved in operating one or more specific types of charitable programs or public charities. However, some public charities, such as community foundations, issue grants to other people and organizations to carry out charitable programs.
- Operating Restrictions
Since private foundations are less open to public scrutiny, they are subject to greater operating restrictions than public charities. Failure to follow these restrictions can result in the assessment of excise taxes and penalties. Along with the restrictions that apply to all 501(c)(3) organizations, these additional restrictions include:
- No self-dealing between private foundations and their substantial contributors and other disqualified persons;
- Annual distributions of income for charitable purposes;
- No excess business holdings with disqualified persons;
- Investments must not jeopardize the carrying out of exempt purposes;
- Excise taxes assessed on net investment income; and
- Other provisions designed to ensure that all expenditures further exempt purposes.
Private foundations also are liable for excise taxes on some permissible activities. For instance, any lobbying activity by a private foundation, whether insubstantial or not, creates a taxable expenditure.
In contrast, public charities are not subject to this degree of restriction. Like all 501(c)(3) organizations, public charities must ensure that their earnings do not inure to the benefit of any private shareholder or individual. Activities that constitute inurement may cause the assessment of excise taxes as penalties on individuals who benefit from excess benefit transactions and jeopardize the charity’s tax-exempt status.
Contact Us Today for Legal Assistance With Private Foundations
The California Center for Nonprofit Law focuses its practice on legal matters that affect private foundations and other nonprofit organizations in California. This unique focus allows us to concentrate on keeping abreast of the ever-changing laws and policies as they develop over time. We are here to represent the interests of your nonprofit organization throughout every stage of your legal matter. Call us at (949) 892-1221, email us at firstname.lastname@example.org, or fill out our contact form online and schedule a consultation about your nonprofit organization today.