What Is a Private Foundation?

Volunteers help construct a house.
•••

Jose Luis Pelaez / Getty Images

DEFINITION
Private foundations are nonprofit charitable entities that tend to be created by a single benefactor or at most, a small number of sources.

Private foundations are nonprofit charitable entities that tend to be created by a single benefactor or at most, a small number of sources. Usually, private foundations are created by individuals or businesses, and the funds they receive come from a single source (unlike public charities that fundraise from many different sources).

Definition and Example of Private Foundation

Private foundations are charitable entities supported by a single benefactor or by a small number of sources. It’s common to see private foundations supported by a business, a family, or an individual.

Private foundations serve charitable needs that may relate to social, educational, or religious causes. These foundations often have a board of directors who are in charge of making decisions about how the foundation’s money is used, and using it in the foundation’s best interest.

The IRS categorizes 501(c)(3) organizations as either public charities or private foundations. These designations are determined based on the level of public involvement in the charitable activities.

Public charities typically receive a greater portion of their financial support from either government units or from the general public. On the other hand, private foundations typically receive their financial support from an individual or small group. In some cases, private foundations receive their support from investment income.

Private foundations are less open to public scrutiny because of their lack of public involvement, but they are subject to operating restrictions and must excise taxes if they don't comply with those restrictions.

According to tax law, a section 501(c)(3) organization is considered to be a private foundation unless it specifically requests (and qualifies) to be considered a public charity. 

How Private Foundations Work

There are a few rules from the IRS that private foundations must follow. These include:

  • Private foundations must file Form 990-PF, Return of Private Foundation each year.
  • Investment income of a private foundation qualifies for an excise tax for most domestic private foundations.
  • Some foreign private foundations may also have to pay a tax on gross investment income if that income is derived from United States sources.
  • There are restrictions on private foundations surrounding how they deal with their substantial contributors and other disqualified people.
  • It’s a requirement that a private foundation annually distributes income toward charitable purposes.
  • There are limits on what a private foundation’s holdings in private businesses can be.
  • Investments can’t harm the carrying out of exempt purposes, and there must be provisions in place to ensure that any expenditures further exempt purposes.

Types of Private Foundations

How a private foundation is funded and governed determines what type of foundation it is. While the following terms aren’t legal classifications, they are commonly used to convey how a private foundation operates:

  • Independent foundation: An independent foundation receives its support from an endowment that comes from a single source.
  • Family foundation: Usually, a family foundation is funded by an endowment from one family.
  • Corporate foundation: This is a philanthropic organization that is financially supported by a corporation and is a separate legal entity from the corporation financing it.
  • International foundation: This type of private foundation is generally located outside of the United States, and it creates grants in its own country. This type of foundation may also refer to one that engages in cross-border giving.
  • Private operating foundation: This private foundation primarily operates its own charitable programs, but in some cases, it may also make grants.

Private Foundations vs. Public Charities

Let’s look at the differences between these private foundations and public charities as  501(c)(3) organizations.

Private Foundation Public Charities 
Supported by an individual or small group Supported by the public or government
Must adhere to IRS rules and regulations Follows conduct standards set by the public

The main difference between these two types of 501(c)(3) organizations is how their funds are acquired.

Unlike private foundations, which receive the bulk of their support from an individual or small group, public charities receive support from the public. For that reason, charities are open to public scrutiny. They need to adhere to what the public considers to be appropriate standards.

In contrast, private foundations must follow IRS rules and regulations. That said, even though public charities aren’t as heavily regulated as private foundations, they often follow the same rules and regulations as private foundations.

Some examples of organizations that could qualify to be a public charity include churches, schools, hospitals, medical research organizations, and publicly-supported organizations.

Pros and Cons of Private Foundations

Private foundations differ from public charities, and they have both pros and cons to consider if you are planning to establish your own charitable organization.

Pros
  • Less public scrutiny

Cons
  • IRS rules and regulations

  • Fewer sources of funding

Pros Explained

  • Less public scrutiny: Because funds don’t come from government or public sources, there is less scrutiny surrounding how private foundations operate than there is with public charities.

Cons Explained

  • IRS rules and regulations: Private foundations must adhere to strict IRS rules and regulations.
  • Fewer sources of funding: Because private foundations are financed by one or very few sources, they can’t fundraise from many different sources like public charities can.

Key Takeaways

  • Private foundations are nonprofit charitable entities financed by an individual, family, or business, but not the public.
  • Private foundations are subject to strict IRS rules and regulations.
  • 501(c)(3) charitable organizations can be considered to be a private foundation or a public charity, according to IRS standards.

Article Sources

  1. Council on Foundations. “Foundation Basics.”

  2. IRS. “EO Operational Requirements: Private Foundations and Public Charities.”

  3. IRS. “Private Foundations.”

  4. Council of Foundations. “Foundation Basics.”

  5. The Pension Protection Act. “Pension Protection Act | Council on Foundations.”