The terms, foundation and nonprofit seem similar since these organizations aim at helping underprivileged families. There is a fundamental difference between how they are formed, and governed, the source of funding, and how they operate. A private foundation is a nonprofit charitable entity that is generally created by a single benefactor, usually a corporate entity, a family, or a business through an endowment of funds. While nonprofit refers to a public charitable organization that derives its funds from the government, foundations, or institutions.
If an individual has strong charitable convictions, it is advisable to set up a private foundation. Private foundations create a framework of involving the family in long-range charitable giving, investing, and controlling funds to meet charitable goals and commitments.
How does a private foundation work?
According to the Council on Foundations, establishing a private foundation needs no legal requirements, they are simply a private foundation governed and funded by family members. As private foundations are established for charitable purposes, they must comply with IRS rules to ensure that they are active and that their expenditures benefit the public.
The private foundations disseminate five percent of assets every year following the foundation’s charitable purpose. The funding of private organizations involves an ongoing basis with assets that include cash, publicly traded securities, private stock, real estate, or other family-controlled assets.
About 50 percent of private foundations in the U.S. members are family foundations that are operated by members of the foundation’s board. The board decides how the assets of the foundation can be used to meet the mission and objectives of the foundation. The foundation is managed by the family manager or by the chief operations officer.
The private foundation donors include family members who enjoy full control over how the foundation’s charitable assets are invested and granted. They also explain the philanthropic goals and prospects of the organization. The private family foundation is entitled to significant tax benefits such as reduction of the donor’s income tax, avoidance of capital gains taxes, and elimination of potential estate taxes. Moreover, it is easier to maintain the family name using a foundation. It builds strong ties within the family with a common interest. The private foundation’s board includes several members from a donor’s family, such as the spouse, children, or grandchildren. Consequently, establishing a foundation comes as a way to pass long-term charitable giving goals to younger family members.
Private foundation involves two types as Non-Operating Foundations and Operating Foundations. Non-Operating Foundations conduct their direct charitable activities that consist of making grants to public charities, grants to individuals, awarding scholarships, and making grants to international organizations that aren’t recognized as 501(c)(3) charities, etc. Generally, a non-operating foundation makes an annual distribution that includes grants to charities, investment expenses, and administrative costs.
An operating foundation is involved with the charitable projects initiated by the foundation. They are directly engaged in carrying out their charitable activities by conducting charitable projects rather than making grants to other organizations.
Setting up a Public Charity
Public charity refers to large or small tax-exempt organizations seeking to solve a specific community need. They usually serve a public purpose such as enriching the lives of people in the community and enjoying special considerations in terms of tax, legal status, and accountability.
All organizations described in Section 501(c)(3) of the Internal Revenue Code are either private foundations or public charities. The Internal Revenue Service classifies an organization described in Section 501(c)(3) of the Code as a private foundation or public charity. Moreover, a public charity should represent the public interest by having a diversified board of directors. More than 50% of the board members should be unrelated by blood, marriage, or outside business co-ownership. The IRS requires that a public charity should receive at least one-third of its contributions from the general public.
The strategic objectives of a nonprofit organization are to provide community services and develop programs that fulfill charity services. The nonprofit uses the publicly collected funds to directly support its initiatives, such as operating a homeless shelter or providing medical care to underprivileged families. Moreover, the public charity organizations receive funding from a range of grant funders, trusts, and individual philanthropists to run regional development programs, and campaigns. Each program involves long-term goals of providing voluntary services and is designed to provide ongoing support to help local groups to improve digital skills and develop a wider culture of fundraising. The fundraising campaigns support local charity foundations to build relationships with the donors and develop fundraising and marketing experience.
Key Difference between Private Foundation and Nonprofit
Acquisition of Funds
An essential difference between a private foundation and a public charity is the method of receiving funds. Public charities in contrast to private foundations are heavily supported by the public. For this reason, public charities are more subject to public scrutiny, which can help ensure their appropriate standards of conduct. Private foundations are charitable organizations that are established with funds from a single source or specific sources, such as family or corporate money. Therefore, they are subjected to more strict rules and regulations including strict prohibitions on self-dealing, and limits on the amount of stock they can hold in any one company.
Charitable program
Public charities are restricted to activities related to their charitable purpose, as stated in their Articles of Incorporation. While private foundations typically don’t carry out a direct charitable program. They invest funds and distribute at least five percent of their assets to their charitable priorities through grants, scholarships, or donations.
Disbursement of Funds
A second difference is in how the funds are used. A private foundation working as a nonprofit organization has a principal fund managed by its trustees or directors. Private foundations maintain aid for charitable, educational, religious, or other activities serving the public good, primarily through making grants to individuals or other charities. While public charities use their money to carry out direct activities. The difference is mainly in control and flexibility. With a private foundation, the donor maintains control over charitable donations and other disbursements. Private foundations can hire staff, reimburse expenses, set up structured giving programs such as scholarships, and make grants directly to individuals in need.
Establishment and administration
A private foundation must establish a legal entity and apply for tax-exempt status from the Internal Revenue Service (IRS). Private foundations are overseen by a board of directors or trustees that is responsible for determining, often with the help of professional advisors, the affairs of the foundation, including how foundation assets are invested and grants are distributed. A public charity must prove to the IRS that it qualifies to become a charity organization. It should choose a purpose, form a corporation and file paperwork with the IRS, comply with state and local requirements, and maintain its nonprofit status.
