501c3 Public Charity or Private Foundation

Every section 501c3 organization is classified as either a private foundation or a public charity. Private foundations and public charities are distinguished primarily by the level of public involvement in their activities. 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, but there are some significant differences that can determine what type of nonprofit organization you want to setup.

Public charities/foundations represent the largest share of active, nonprofit organizations. Generally, they receive a greater portion of their financial support from the general public, receiving grants from individuals, government, and private foundations. They naturally have a greater interaction with the public. 501c3 Nonprofit public foundations have 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.

501c3 Private Foundations are non-profit charitable entities, which are generally created by a single benefactor, usually an individual, family, or business. They derive much of their support from a small number of sources and from investment income, not from the general public. Because they are less open to public scrutiny, private foundations are subject to various operating restrictions and to excise taxes for failure to comply with those restrictions. Private foundations have a lower deductibility limit to donors, mandatory Form 990-PF filings, and specific annual asset distributions.

Under the tax law, a section 501c3 nonprofit organization is presumed to be a private foundation unless it requests, and qualifies for, a ruling or determination as a public charity. Deciding which type of foundation to set up completely depends on each organization’s programs, plans, intentions, and income sources.