Recently, we discussed public charities: what they are, how they function, how they are treated by the IRS. Today, we will discuss what lies on the other end of the nonprofit spectrum: Private Foundations. 

Funding of a Private Foundation

A private foundation is a charitable organization that does not qualify as a public charity. 

  •  Unlike public charities, a private foundation receives its funding from a single source, typically from a family or from individual donation.
  • Board members often consist of family members or business associates and are not required by the IRS to diversify.
  • Private foundations are controlled by their founders and donors, and can be passed on for generations within a family or business. 

Taxes of Private Foundations

  • Like public charities, private foundations are tax exempt. 
  • Donors receive tax deductions for their contributions.
  •  However, private foundations are required to pay an exise tax (taxes paid for specific goods) of a percentage of their net investment income. 
  • In order to maintain their status with the IRS, private foundations must make continuous contributions to the charities they work with although they are not required to participate in fundraising. 

Formation of Private Foundations

Private Foundations can be formed in two different ways: 

1) As private operating foundations; or,

2) As private non–operating foundations. 

Operating Foundations: 

  • Conduct their own charitable, educational or exempt events and activities.  
  • Distribute funds to its own programs that exist for charitable purposes.
  • Are less likely to make grants.
  • Are the most similar to public charities.
  • Must spend 85% of their investment income on charities.
  • Contributions to operating foundations are deductible to taxpayers on the same basis as contributions to public charities.

Non-Operating Foundations:

  • Principally provide grants to other entities or to individuals for charitable or exempt purposes.
  • They must match 5% of their previous year’s investment assets through their yearly distributions. 

There are many factors to consider when starting a non-profit organization and which direction to take it in.