What is the difference between a private foundation and a public charity?

Both are 501(c)(3) organizations. The difference is where the money comes from and, following that, how tightly the IRS regulates the organization. A public charity draws support from a broad base: the general public, government grants, program revenue, or many small donors. A private foundation is typically funded by one family, one individual, or one company, holds an endowment, and makes grants out of it. Every 501(c)(3) is presumed to be a private foundation unless it establishes that it qualifies as a public charity, so this is a status you claim and then keep proving.

How the classification is set

Some organizations are public charities by their nature: churches, schools, hospitals, and certain medical research organizations qualify because of what they do. Everyone else qualifies through a public support test, which measures the share of total support coming from the public and from government sources over a rolling multi-year window reported on the annual return. An organization that starts with broad support and later comes to depend on one large donor can tip into private foundation status without changing anything about its programs, which is why development staff watch the support calculation, not just the total raised.

Supporting organizations sit in between, qualifying as public charities because of their relationship to one or more public charities, and they carry their own control and responsiveness rules. Private operating foundations are foundations that run their own programs rather than making grants, and they get some of the more favorable deduction treatment while keeping foundation status.

What changes when you are a foundation

• An excise tax applies to net investment income, which public charities do not pay.
• Self-dealing rules prohibit most transactions between the foundation and its substantial contributors, officers, and their families, even transactions on terms favorable to the foundation.
• A minimum annual distribution requirement forces a share of assets out the door for charitable purposes each year.
• Limits apply to business holdings, to investments that jeopardize charitable purposes, and to grants for lobbying or to individuals without advance approval procedures.
• The annual return is Form 990-PF rather than Form 990, and it lists every grant made and every substantial contributor.
• Donors deducting gifts to a private foundation face lower percentage-of-income ceilings than donors giving to public charities, and appreciated property is often valued less favorably.

Grants also flow differently. A private foundation making grants to organizations that are not public charities generally has to exercise expenditure responsibility, tracking how the money is used and reporting on it. Public charities regranting funds have a lighter path.

The state layer for each

State charitable regulators care about both, but they see them differently. Public charities that solicit the public generally must register in most states before soliciting their residents, renew annually, and file financial statements with the renewal. Private foundations that never solicit are exempt from registration in many states, though some still require an initial registration or an annual copy of the 990-PF, and a few treat any charitable asset holder as reportable. A foundation that starts fundraising, even from a small circle of allied donors, moves into the solicitation rules and should check them before the first ask. Our charitable registration state laws guides cover which filing each state expects and from whom.

Grantmaking across state lines can also create presence questions: an office, staff, or a sustained program in another state usually means foreign qualification and a registered agent there. Cornerstone handles registrations, renewals, and the corporate filings behind them through our nonprofit licensing practice for both foundations and public charities.