10/05/2025. This article was originally written 10/01/2013; it has been updated annually.
If you’re forming or managing a 501(c)(3) nonprofit organization, understanding the difference between a public charity and a private foundation is essential. While both are tax-exempt organizations under IRS rules, they differ significantly in funding, legal requirements, and how they operate.
The nonprofit world can be confusing with terms like public charity, private foundation, corporate foundations, private operating foundations, and public charities that act as foundations. What do these terms mean, and how can you tell which is which?
This blog breaks down the key distinctions, benefits, and which structure might be right for your goals.
What is a 501(c)(3) Entity?
The Internal Revenue Code distinguishes Section 501(c)(3) nonprofit organizations into various sub-categories, including private foundations and public charities. They are distinguished by a number of factors, including the level of public involvement in their activities.
But all IRS Section 501(c)(3) entities must be organized and operated for one or more of these purposes:
- charitable
- religious
- educational
- scientific
- public safety testing
- literary
- amateur sports
- prevention of cruelty to children or animals.
These core requirements apply to both public charities and private foundations.
Difference Between Public Charity and Private Foundation
What is a Public Charity?
The IRS sets out categories (Section 509(a)) for organizations to be considered a 501(c)(3) public charity. We cover only three of those categories here.
- Organizations Deemed Public Charities by Nature: churches, schools, hospitals, and more
Certain groups, like churches, schools, universities, and hospitals, are classified as public charities based on their function and purpose, regardless of their funding source. There are several others in the classification. Classification: 509(a)(1) - Publicly Supported Organizations
Some public charities receive a substantial part of their financial support from the general public, from a government unit (like government grants), from publicly supported organization. This might include private foundations, individuals, and other public sources. Because of this broad support, they meet an IRS public support test. Classification: 509(a)(1) - Organizations with Exempt-Function Revenue
Some public charities generate revenue from activities directly related to their exempt purposes – such as tuition, fees for services, or program-related sales. These organizations normally receive not more than 1/3 of their financial support from investment invoice and receive more than 1/3 of their financial support from contributions, member fees, and activities tied to their exempt functions. Classification: 509(a)(2) - Supporting organization
Some public charities exist solely to support one or more public charities and qualify as such under . They do not have to meet the public support test but must operate in close relationship with public charities. Examples include alumni foundations supporting colleges or ministries affiliated with churches. Within the supporting organization classification, there are three sub-types. Classification: 509(a)(3)
*Note that there is another category and there are distinctions within each that we do not cover all here; this is a brief summary article. You may like to work with an attorney who works exclusively with tax-exempt nonprofits to help you with the classification or re-classification of your entity.
Public Charities That Grant Money to Other Charities
Some public charities primarily function as grantmakers. For example, community foundations accept tax-deductible contributions from the public, invest those funds, and make grants to other public charities. Though they may look like private foundations because of their grant-making role, community foundations qualify as public charities because they satisfy public support requirements and maintain public oversight, such as advisory boards and community input.
What is a Private Foundation?
Private foundations are charitable organizations that do not qualify as public charities. Private foundations don’t meet one of the public charity tests under Internal Revenue Code Section 509. Private foundations are
- Typically funded by a single family, individual, or corporation
- Often controlled by a smaller group of people
- Often derive income from investment returns
- Might operate as grantmaking organizations, distributing funds to public charities
The IRS recognizes:
- A non-operating private foundation might grant funds to other tax-exempt charitable organizations. It accomplishes its exempt purpose by grant-making to other organizations. These foundations often do not directly perform any charitable programs or services other than grant-making.
- A private operating foundation might distribute funds to its own programs that exist for charitable purposes. It devotes most of its resources to the active conduct of its exempt activities. These organizations are called private operating foundations because they are private foundations that actively conduct their own charitable, educational, or other exempt programs and activities. Examples of operating foundations include museums, zoos, research facilities, libraries, etc. Also, it is important to note that to qualify as operating, the foundation must satisfy an income test and one of three additional tests set forth by the IRS.
Private Foundation Restrictions
Because they may be less open to public scrutiny, private foundations are subject to various operating restrictions and to excise taxes for failure to comply with those restrictions.
Some restrictions and requirements on private foundations include:
- No self-dealing – Restrictions on self-dealing between private foundations and their substantial contributors and other disqualified persons. See Internal Revenue Code (IRC) Section 4941.
- Minimum payout requirement – Requirements that the foundation annually distribute income for charitable purposes. See IRC Section 4942.
- Limits on their holdings in private businesses – A foundation cannot have excess business holdings (a controlling interest in a for-profit company, partnership, etc.) with disqualified persons. See IRC Section 4943.
- Jeopardy Investments – Provisions that investments must not jeopardize the carrying out of exempt purposes. See IRC Section 4944.
- Excise Tax – Internal Revenue Code (IRC) Section 4940 imposes an excise tax on net investment income.
- Provisions to assure that expenditures further exempt purposes. IRC Section 4945 provides a list of various kinds of grantmaking or other expenditures that can subject a private foundation and its manager to penalty for making taxable expenditures. For example, funds spent in support of or in opposition to a political candidate, grants to non-charities and certain supporting organizations without exercising expenditure responsibility, and grants for non-charitable purposes would subject a foundation to taxes
Violations of these provisions give rise to taxes and penalties against the private foundation and, in some cases, its managers, its substantial contributors, and certain related persons.
Why is the Word “Foundation” So Confusing?
Not every organization that uses the word “foundation” in its name is a private foundation. Many public charities use the word “foundation” in their name. To look further to discover an organization’s actual tax-category, review the organization’s IRS filings: public charities will file Form 990; private foundations file Form 990-PF.
Resources
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