Do you want to set up a private foundation or a public charity? Both of these organisations have their benefits and drawbacks, and it’s important to know the differences between them before deciding which type is right for you.

In this blog post, we will explore the distinctions between private foundations and public charities in terms of how they are structured and governed and their respective tax deductions.

We'll also discuss some key questions you should ask yourself to help make your decision easier. Knowledge of the pros and cons of each type can allow you to make an informed choice about which is best for achieving your giving goals.

Overview of Private Foundations and Public Charities

Private Foundations

A private foundation is typically funded by a single individual or family and established for philanthropy. It typically requires its own endowment from which grants are made to organisations and individuals.

Private foundations are exempt from some federal taxes, and donations to a private foundation may be tax-deductible for the donor. The board of directors of a private foundation is typically composed of family members or close confidants who have ultimate control over its operations.

Public Charities

By comparison, public charities are established for charitable, educational, religious, scientific, and literary purposes. These organisations can accept donations from the public, which may be tax-deductible for donors who itemise their deductions.

Public charities rely on public support for their operations and generally have a broader scope of activities than private foundations.

Why Knowing the Difference is Important for Donors

When deciding whether to set up a private foundation or public charity, it’s important to understand the differences between the two entities. Your tax deductions and other benefits could vary significantly depending on which type of organisation you choose.

Private foundations are generally funded through donations from individuals or families. They are not required to register as a 501(c)(3) organisation and are subject to fewer restrictions regarding how the money is used.

However, private foundations may have more stringent requirements for reporting and compliance requirements and higher taxes on investment income.

In comparison, public charities are typically funded through donations from various sources such as individuals, corporations, and foundations. These organisations must register as 501(c)(3) to receive tax-deductible contributions from donors.

How Private Foundations Differ From Public Charities

Private foundations and public charities are two types of nonprofits that both seek to provide social good. However, several differences can help you determine which type is better for your organisation.

First, private foundations are typically formed by an individual or family with substantial wealth who contribute financially to their foundation from multiple sources. On the other hand, public charities are typically funded by various sources such as individual donations, government grants, and corporate sponsorships.

The structure and governance of private foundations and public charities also differ significantly. Private foundations are generally managed by their founders or board members, who decide how money is spent. Public charities are typically overseen by a board of directors with no controlling interest and must comply with regulations set forth by the Internal Revenue Service (IRS).

Advantages of Private Foundations

• Greater control and flexibility – Private foundations generally have fewer restrictions than public charities, allowing more flexibility in how their funds are used. This allows the donor greater control over their philanthropic endeavours and chooses projects that reflect their interests and values.
• Long-term impact – Private foundations can be established for generations, providing a lasting legacy of giving which could outlive its founders.
• Tax benefits – Private foundations are usually exempt from federal income tax, and donors may be able to deduct contributions made to them in certain cases.

Disadvantages of Private Foundations

• Significant Administrative Burden – Private foundations are subject to significant administrative and reporting requirements that must be met or face steep penalties from the IRS or state agencies. For example, expense record keeping needs to be done meticulously, and the annual filing of Form 990PF is required.
• Donor-Limitations – Contributions to private foundations are subject to limitations that do not apply to public charities. For example, a maximum of 30 per cent of total contributions can be in the form of capital gains assets each year, which may make it difficult for a private foundation to grow quickly.
• Taxes – Private foundations are subject to federal excise taxes on income earned and those paid by the donors of contributions. There is also an annual minimum tax that must be paid. These taxes can significantly reduce the amount of money available for charitable activities.

Advantages of Public Charities

• Tax Advantages - Public charities can receive tax deductions from donations and other contributions, which can result in significant savings for the organisation. Many public charities are also exempt from certain state and local taxes.
• Flexible Rules & Regulations - There is a much lower level of regulation for public charities than for private foundations, which makes them easier to manage with fewer restrictions.
• Access to Public Funds - Public charities can access public grants and other funding sources that private foundations do not. This can be a great benefit if your organisation seeks additional funds or support.

Disadvantages of Public Charities

• Fundraising challenges – Public charities must spend a significant amount of time and resources on fundraising efforts, as they cannot rely solely on the contributions made by private foundations. This process can be expensive and require additional staff or volunteer hours to meet donation goals.
• Donor restrictions – Donors may have restrictions on how their money can be used, which limits the public charity’s ability to use the funds for various initiatives.
• Limited scope – Public charities can only operate within the bounds of their mission, which may limit the range of activities they can pursue and create unnecessary competition with other public charities.

FAQs

What is the function of a private foundation?

A private foundation is a non-profit organisation created and funded by individuals or businesses to pursue charitable, educational, religious, or other activities. Private foundations are typically independent of any government body and are often used as vehicles for long-term philanthropy.

What is the function of a public charity?

Public charities are non-profit organisations created to serve the public good. They may receive donations from individuals, corporations, and other charitable foundations, as well as government funding or grants. Public charities often focus on providing services in specific areas such as education, health care, or social welfare.

Can a private foundation do fundraising?

Private foundations can engage in fundraising activities if they do not directly solicit funds from the general public. Private foundations may conduct fundraisers to build endowments or to benefit other charities.

Conclusion

In conclusion, it is imperative to understand the distinct differences between a private foundation and a public charity when deciding which type of organisation best serves your philanthropic goals. While both types of organisations offer substantial advantages, they have drawbacks too.