Private Foundations and Public Charities – What’s the Difference?

Operating with a specific goal or mission is the main purpose of a nonprofit organization. Functioning as a nonprofit, your organization must continue to further your goals without any profit or gain to benefit shareholders or board members. Any forms of access funds must cycle back into the organization to continue with the mission.

Structuring a business to fall under the 501(c)(3) organization allows you to obtain federal income tax exemption. During daily operations, the federal exempt status is a way to save your organization money. Using the nonprofit arrangement allows you to obtain other various tax credits and benefits to continue to operate at lower costs.

Yearly changes to the tax system mean you must stay current to maximize the benefits for your nonprofit. Consulting with a reputable CPA firm or tax accountant should be a priority. As a leader in your nonprofit organization, you want the best results. Further classification for a 501(c)(3) organization will place your nonprofit into the private foundation or public charity category. Each will have specific tax implications.

Private Foundations or Public Charities

The main differences between a private foundation and a public charity are the amount of public involvement and the nature of the work.

1. Private Foundations

Generally managed by an individual, trustees or board of directors, a private foundation supports or maintains other forms of nonprofit organizations including religious, educational, and community support facilities. The funds to operate a private foundation often come from individuals or corporate sources.

Transforming the funds into gifts or grants allows the private foundation to help others. Specific guidelines or requirements may be part of the gift-giving contribution to an individual or charity. For example, a scholarship from a private foundation may require a specific field of study prior to awarding.

Using the private foundation status allows you to obtain more control over your nonprofit organization. Since the goal is to help other nonprofit organizations, private foundations can operate with minimal overhead.

2. Public Charities

Public charities create the largest amount of 501(c)(3) nonprofit organizations. Being a public charity, the nonprofit organization has more interaction with the public. The interactions help the nonprofit in many ways. Mainly, the public charity receives the majority of revenue from the general public to help further the mission. Making the public charity category more attractive to newly formed nonprofit organizations. Other sources of funds come from private organizations or governmental grants.

Along with reaching a larger source of revenue from the general public, a public charity has many benefits over private foundations. A public charity is able to receive higher donations from individuals due to the increased giving limits. Receiving public charity status also allows your nonprofit organization to receive funds from other public charities and private foundations.

Simplifying the complexities of private foundations and public charities, a CPA firm can help you with tax regulations, guidelines, and other legal requirements.  If you are unsure which category your nonprofit falls into, contact the CPAs at Ernst Wintter & Associates for assistance.

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