501(c)(3) Public Charity vs Private Foundation

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on February 15, 2024

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501(c)(3) Public Charity vs Private Foundation

The main difference between public charities and private foundations is their source of funding and the level of control they have over their assets.

Public charities rely on donations from a diverse group of individuals and entities, while private foundations are typically funded by a smaller group of donors.

Private foundations also have more restrictions on their activities and investments, and must distribute a minimum percentage of their assets each year to other charitable organizations.

What Is a 501(c)(3) Public Charity?

A 501(c)(3) is a public charity, meaning that at least one-third of its income must come from public donations. A private foundation is usually funded by a single individual or a small pool of individuals, such as the Bill and Melinda Gates Foundation.

Public charities are further divided into two subcategories:

  • Organizations that receive a substantial part of their support from contributions, membership fees, and grants from the general public, such as churches, schools, and hospitals

  • Organizations that receive a substantial part of their support from government grants and contracts, such as universities, museums, and research institutions

Qualification Criteria for Public Charities

To qualify as a public charity, an organization must meet one of two tests:

  • The 33.3 % support test

  • The facts and circumstances test

The 33.3% support test requires that the organization receive more than one-third of its support from contributions, membership fees, and grants from the general public, government agencies, and other public charities.

The facts and circumstances test, on the other hand, considers a variety of factors, such as the sources of the organization's income, its activities and programs, and the extent to which it is dependent on a small number of donors.

Benefits of Being a Public Charity

The benefits of being a public charity include tax-exempt status, which means that the organization is not required to pay federal income tax on its income, and tax-deductible contributions, which means that donors can deduct their contributions on their federal income tax returns.

Public charities also have greater flexibility in how they use their funds, and they are subject to fewer restrictions on their grant-making activities than private foundations.

What Is a 501(c)(3) Private Foundation?

A 501(c)(3) private foundation is a tax-exempt organization under the Internal Revenue Code that is organized and operated exclusively for charitable, religious, educational, scientific, or literary purposes.

Unlike public charities, private foundations do not receive a substantial part of their support from the general public or from government grants and contracts. Instead, they are typically funded by a small group of individuals, families, or corporations.

Qualification Criteria for Private Foundations

To qualify as a private foundation, an organization must meet certain criteria, such as:

  • It must be organized as a corporation, trust, or other legal entity under state law

  • It must be operated exclusively for charitable, religious, educational, scientific, or literary purposes

  • It must be funded by a small group of individuals, families, or corporations, rather than by the general public or government grants and contracts

Benefits of Being a Private Foundation

Being a private foundation means having tax-exempt status, which means that the organization is not required to pay federal income tax on its income, and tax-deductible contributions, which means that donors can deduct their contributions on their federal income tax returns.

Private foundations also have control over their funding and grant-making activities, and they can directly fund specific projects or organizations that align with their charitable mission.

Differences Between Public Charities and Private Foundations

There are several significant differences between public charities and private foundations, including governance and control, funding, tax benefits, grant-making activities, and public disclosure and reporting.

Differences Between Public Charities and Private Foundations

Governance and Control

Public charities are typically governed by a board of directors or trustees, and their operations are subject to oversight by state and federal regulatory agencies.

Private foundations, on the other hand, are typically controlled by a small group of individuals, families, or corporations who make all major decisions about the foundation's operations and grant-making activities.

Private foundations are not subject to the same level of oversight as public charities, but they must still comply with a number of regulations to maintain their tax-exempt status.

Funding

Public charities receive a substantial part of their support from the general public or from government grants and contracts. Private foundations, on the other hand, are typically funded by a small group of individuals, families, or corporations.

Private foundations must distribute a minimum of 5% of their assets each year to maintain their tax-exempt status, while public charities have no minimum distribution requirement.

Tax Benefits

Both public charities and private foundations are tax-exempt under the Internal Revenue Code, which means that they are not required to pay federal income tax on their income. However, there are some differences in the tax benefits that each type of organization enjoys.

Public charities are eligible for a wider range of tax deductions than private foundations, and they are not subject to the same restrictions on executive compensation and lobbying activities.

Grant-Making Activities

Public charities have greater flexibility in their grant-making activities than private foundations. Public charities can make grants to individuals, as well as to other organizations, and they are not subject to the same restrictions on grant-making as private foundations.

Private foundations, on the other hand, are limited in the types of organizations and projects they can fund, and they must follow strict rules to ensure that their grant-making activities are consistent with their charitable mission.

Public Disclosure and Reporting

Public charities are required to file an annual information return with the IRS, which is available to the public. This return includes information about the organization's finances, activities, and governance structure.

Private foundations are also required to file an annual information return, but they are subject to additional reporting requirements and restrictions on their investments and grant-making activities.

Conclusion

Choosing between public charity and private foundation status is an important decision for non-profit organizations.

Both types of organizations offer significant tax benefits, but they differ in their governance and control, funding, tax benefits, grant-making activities, and public disclosure and reporting requirements.

Non-profit organizations should carefully consider these factors and seek professional advice before deciding which type of organization to pursue.

Understanding the differences between public charities and private foundations is critical to successfully navigating the world of non-profit organizations and ensuring that the organization can achieve its charitable mission.

501(c)(3) Public Charity vs Private Foundation FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.

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