Public Charity vs. Private Foundation: Key Differences

All nonprofit organizations seeking tax-exempt status under Internal Revenue Code (IRC) Section 501(c)(3) are not created equal. While they all serve charitable purposes, the Internal Revenue Service (IRS) classifies them into two main categories: public charities and private foundations. This distinction dictates the rules under which an organization must operate and the funding sources it can use.

When an organization applies for 501(c)(3) status, the IRS presumes it is a private foundation by default. To be classified as a public charity, the entity must formally request and prove to the IRS that it meets specific criteria. This initial classification has long-term consequences, shaping an organization’s governance structure and its relationship with donors.

The Public Support Test

The primary factor the IRS uses to distinguish a public charity from a private foundation is the source of its financial support. This is measured through the public support test, a calculation that demonstrates an organization is supported by the general public rather than a few major donors. Failing this test can lead the IRS to reclassify a public charity as a private foundation, a situation known as “tipping,” which imposes more restrictive rules.

The most common way to meet this requirement is through the “mechanical test” under IRC Section 509. This test requires that at least one-third of the organization’s total support over a rolling five-year period comes from public sources. Public support includes small donations from the public, government grants, and contributions from other public charities. For calculation purposes, large donations from individuals or private foundations are limited to 2% of the organization’s total support, preventing a few substantial gifts from skewing the ratio.

For example, a nonprofit with $900,000 in total support over five years must show at least $300,000 is public support. If it received a single $400,000 grant from one private foundation, that grant would be capped at $18,000 (2% of $900,000) for the test, making it difficult to meet the one-third threshold.

For organizations that do not meet the 33.3% requirement, there is an alternative known as the “facts and circumstances test.” To qualify, an organization must still receive at least 10% of its support from the public. The organization must then demonstrate to the IRS that it is actively seeking public funds and has a governing body that represents the broad interests of the public.

Key Operational and Governance Differences

Public charities run their own charitable programs and actively solicit financial support from a wide array of sources, including the public, government agencies, and other charities. Private foundations, in contrast, are often funded and controlled by a single source, such as an individual, a family, or a corporation. Their primary activity is making grants to other organizations, usually public charities, that perform direct service work.

This allows the foundation’s founders to direct philanthropic capital toward various causes without building the infrastructure to manage programs themselves. The Bill & Melinda Gates Foundation, for example, primarily makes grants to other entities to achieve its global health and development goals. A public charity is expected to have a board of directors that is broadly representative of the public interest, ensuring accountability to its donors and the community.

Major donors have limited control over the organization’s governance. This structure is designed to prevent the organization from serving the private interests of a small group of individuals. Conversely, the governance of a private foundation is often closely held by its founders, family members, or individuals designated by the primary corporate donor. These individuals, referred to by the IRS as “disqualified persons,” can maintain significant control over the foundation’s investment and grant-making strategies.

Tax Treatment and Regulatory Burdens

One of the most notable distinctions is in the tax deductibility of contributions for individual donors. Donations to a public charity are more favorable, allowing individuals to deduct cash contributions up to 60% of their Adjusted Gross Income (AGI) for the 2025 tax year. For private foundations, the AGI limitation for cash contributions is capped at 30%.

For a donor with an AGI of $200,000, a $100,000 cash donation to a public charity can be fully deducted. If the same donation were made to a private foundation, the deduction would be limited to $60,000, with the excess eligible to be carried forward for up to five years. Beyond donor deductions, the organizations themselves are taxed differently.

Public charities are exempt from income tax and are not required to pay tax on their investment earnings. Private foundations, however, are subject to a 1.39% excise tax on their net investment income, which must be reported and paid annually using Form 990-PF. Private foundations are also subject to a set of restrictive rules enforced by the IRS through substantial excise taxes.

One is the prohibition on “self-dealing,” which forbids nearly all financial transactions between the foundation and its “disqualified persons,” such as founders, major donors, and their family members. This includes the sale or leasing of property, lending money, or paying unreasonable compensation. Other regulations include:

• A minimum distribution requirement, which mandates that foundations pay out at least 5% of the fair market value of their non-charitable-use assets each year.
• Rules on “excess business holdings,” limiting their ownership of a for-profit enterprise to 20%.
• Rules against making “jeopardy investments” that are considered speculative or risky.
• Prohibitions on “taxable expenditures,” which include payments for lobbying, political campaign activities, and certain grants to individuals without prior IRS approval.

Choosing the Right Structure

The decision between establishing a public charity or a private foundation depends on the goals, resources, and vision of the founders. Neither structure is inherently better; they simply serve different philanthropic purposes and operate under different constraints.

A public charity is the appropriate structure for those who intend to run direct service programs, such as operating a food bank, a school, or a health clinic. This model is built for organizations that plan to engage in widespread public fundraising and rely on a broad base of community support.

A private foundation is better suited for individuals, families, or corporations who wish to create a philanthropic legacy using private wealth. This structure is ideal for those who want to maintain control over grant-making decisions and direct funds to various causes without the need for continuous public fundraising campaigns. It allows a donor to focus on strategic philanthropy, using the foundation’s endowment to support the work of multiple public charities over the long term.