Public Charity vs. Private Foundation – Understanding the Differences
October 16th, 2009
Fight for the title tonight: In the red corner, numbering 948,954, which represents more than half of the 501 (c) (3) organizations are public charities. And in the blue corner, numbering 108,594, up 54% since 1998, the 501 (c) (3) s known as private foundations. Both competitors wear a long and varied history in the ring. Although largely superseded by public charities, private foundations provide much competition. Let’s look at the differences and similarities between the title contenders.
Many people are aware of the lay of the difference between public charities and private foundations: public charities means to do charity work, while private foundations supporting the work of public charities. This basic definition, in practice, mostly true. The details, however, are a bit more complicated.
Public charities. Public charities account for the bulk of assets, 501 (c) (3) organizations. Those who begin a new organization generally prefer public charity status, not only because it better describes the purpose of the organization. Public charities also enjoy certain advantages over private foundations: higher tax-deductible donor supply limits, the ability to attract support from other public charities and private foundations, as well as an income threshold $ 25,000 to enable the annual filing form 990 (private foundations file Form 990-PF regardless of income). In fact, the applicant for 501 (c) (3) the state must demonstrate why it should be considered a public charity, not to be regarded as a private foundation, by default.
As the definition of the secular public charities often carry out some kind of direct, voluntary. Some examples include churches, private schools, homeless shelters, etc. .. the list of possibilities is almost endless. The true definition of a public charity, however, goes far beyond the programs and in the field of structure and source of income. As for the structure in order to qualify for (and maintain) public charity, a 501 (c) (3) must be organized for exclusively 501 (c) (3) purposes. The IRS requires that certain language in the articles of public charity established explicitly restricting their activities to them. In addition, a public charity must represent the public interest in having a diverse board of directors. Over 50% of the board must be related by blood, marriage or business cooperation outside the property and not be compensated as employees of the organization. Often we are asked where the “code” and, frankly, is not there … at least not literally. This is an extrapolation of the IRS requirements that the governance of a public charity that independently and without private profit (inurement) to insiders. As such, the IRS requires that a quorum of council members will not they have personal interests, either directly or potentially through the relationship. Finally comes the income or source of income test. Public charities should be supported by the general public. For this to be true, a significant amount of revenue, at least 33% must come from relatively small donors (those giving less than 2% of the revenues of the organization), other public charities or government. While it is important that leaves 67% come from other sources potentially less diverse.
Private foundations. While it is considered a private foundation might be just a fallback position does not qualify for public charity, both through the organization or proof of income (or both), is very often a choice made. There are reasons why someone chooses foundation on public charity status. Chief among them is control. In exchange for a little deduction limits disadvantaged donors, a mandatory 990-PF filings, and a minimum annual distribution of assets (5% each year), private foundations can be controlled by the parties linked and financed by a relatively small … even one individual or family (Bill and Melinda Gates Foundation). This is often more than enough to free trade for starting a foundation. One thing that is different for private foundations is the requirement to be organized exclusively for charitable purposes.
There’s even a third type of 501 (c) (3), the private foundation. This is the best as a hybrid of the other two, most often a private foundation program services, such as using public charity. The rules are strict, as the control can be as private foundations, but with some of the benefits of public charity. There are relatively few such organizations around. Usually only seen in these rather unique circumstances.
Source : http://www.501c3.org/blog/public-charity-vs-private-foundation/
Author : Greg McRay, EA
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