Public charities and private foundations, though often used interchangeably, are two different kinds of tax-exempt organizations. Public charities are known for doing charitable services and private foundations are known for supporting the work of public charities. They are closely related but there are some key components that make them different. Below are two definitions provided by google of what a public charity and a private foundation is.
“A private foundation is a nonprofit organization which is usually created via a single primary donation from an individual or a business and whose funds and programs are managed by its own trustees or directors.”
“A public charity is a charitable organization that (a) has broad public support, (b) actively functions to support another public charity, or (c) is devoted exclusively to testing for public safety. Many public charities rely on contributions from the general public. Donations to public charities are tax deductible.”
So what does all of that mean and how are they different?
“Unless an IRC 501(c)(3) organization meets specific requirements, it will be classified as a private foundation rather than a public charity.”
In order to be considered a public charity, an applicant must prove to the IRS in their filing why they should obtain charitable status. A public charity must also have varying board members in order to justly represent the public’s charitable interest (that means the board members must be unrelated by blood or marriage, uncompensated, and not participate in co-operating any other business entities). In order to be granted public charity status, an organization must pass the “income or source of revenue, test” that proves the organization is supported by the public (detailed below).
“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.”
Both business categories are 501c(3) organizations but they vary in benefits and disadvantages. Public charities have the chance to give donors a higher tax deductible and can also receive support from other charities. Private foundations offer more control to the founder or donors while requiring less variation in board members and sources of income or revenue.
Depending on the goal, an organization may benefit from remaining a private foundation instead of filing for public charity status. If an organization’s aim is to simply provide help or support to charities, than remaining a private foundation will suffice but if an organization plans to operate a particular program, public charity may be a more appropriate way to go.
To learn more about the difference between a 501(c)(3) and a 1023 form, check out our blog, "What's the Difference Between A 501c3 and a 1023?"