Public Charity vs. Private Foundation: What's the difference?

Here’s a tip: Avoid using the word foundation in your nonprofit’s name if your sole purpose isn’t to give funds to other organizations.

When starting your nonprofit, it’s important to understand the different types of charitable organizations.

Private foundations (which make grants to other organizations) serve different purposes than public organizations (carry out programs and services).

If you’re calling your nonprofit a foundation, you’re likely going to confuse funders when seeking donations or grants. This may create long-term implications for your organization’s financial health.

Private Foundations

According to Investopedia, "A private foundation is a non-profit charitable entity which is generally created by a single benefactor, usually an individual or business. Using this initial seed donation, an investment is made to generate income, which is then dispersed according to the agency's charitable priorities."

Private foundations' priorities should always align with Section 501(c)(3) of the Internal Revenue Code and focus on providing support to causes such as assisting unhoused individuals, programs that advance education, and community development.

Public Charities

According to the Internal Revenue Service (IRS), "Public charities generally receive a greater portion of their financial support from the general public or governmental units, and have greater interaction with the public."

To summarize some major distinctions between the two, it's important to understand that for tax purposes, "deductibility of contributions to a private foundation is more limited than for a public charity, and private foundations are subject to excise taxes that are not imposed on public charities. Public charities and private foundations also file different annual information returns with the IRS: Public charities file Form 990 or Form 990-EZ, foundations file Form 990-PF." (source: Nolo.com)

Overall, in the nonprofit sector, language is important. It's imperative that when you are setting up your organization, you not only understand its purpose, but also the benefits it will provide to the community.

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