What’s the difference between a public charity and a private foundation?

Although all 501(c)(3) organizations are organized and operated exclusively for religious, charitable, or educational purposes, there are two main types of organizations that fall under this classification—that of public charity and private foundation.

Organizations that qualify as public charities do so by having significant public influence such as a third or more of their income coming from the public or being closely aligned with a public charity and allowing public charity control.  Due to the fact that they have this public “oversight,” the laws that govern these organizations are less restrictive and receive the additional classification of 509(a)(1), (2), or (3).

Private foundations, on the other hand, have little public influence.  They are typically funded by a single source (an individual, family or business); they derive their income from investments; and they make grants to others as their main activity, except in the case of a private operating foundation which operates its own programs.  Due to their private nature, the laws governing private foundations are more stringent, including a requirement that they give away 5% of their assets each year. 

Most people that want to start an organization to address a particular cause are likely to choose the structure of a public charity due to the fact that they do not have an endowment to fund the activities and instead will need to fundraise.

See a helpful webpage from the IRS about the basic differences and the life cycles of public charities and private foundations.