Private vs. Public Non-Profits

Organizations that meet the requirements of Internal Revenue Code section 501(c)(3) are exempt from federal income tax as charitable organizations. Every exempt charitable organization is classified as either a public charity or a private foundation.

The difference between a public charity and a private foundation is that the public charity performs charitable work and private foundations support the work of public charities. In order to qualify for (and keep) public charity status, a 501(c)(3) must be organized for exclusively 501(c)(3) purposes.  Public charities receive grants from individuals, government, and private foundations. Some public charities give grants like the United Way, Community Foundations and The Libertore Fund for Children. A public foundation can attract support from other public charities, as well as private foundations. Private foundations do not solicit funds from the public.

Tax Deductions

A private foundation cannot be tax exempt nor will contributions to it be deductible as charitable contributions unless its governing instrument contains special provisions in addition to those that apply to all organizations described in 501(c)(3). The deductibility for federal income tax purposes of contributions to a private foundation is subject to certain limitations that do not apply to contributions to public charities. For example, the amount of contributions to private foundations that may be deducted for any year generally may not exceed 30 percent of an individual’s adjusted gross income for the year.

Tax Deductions Public vs. Private: 

Public 501(c((3) –100% for 2020 then 60% for 2021

Private Foundation– 30%

Distribution Requirements

Private foundations need to distribute 5% of the net assets of the foundation each year or they are subject to excise tax. There is an excise tax on the net investment income of most domestic private foundations. 

For Public foundations, it is recommended that 65 percent of the nonprofit's total expenses be for program expenses, but no specific qualifications. At least 33% of revenue must come from small donors (those who give less than 2% of the organization’s income, leaving 67% to come from other sources.

Restrictions

Private Non-Profit Restrictions on self-dealing by a disqualified person are:

• Sale, exchange, or leasing of property;
• Leases (exception is those that are arm’s length transactions);
• Lending money or other extensions of credit;
• Providing goods, services or facilities;
• Transferring foundation income or assets to or for the use or benefit of a disqualified person;
• Certain agreements to make payments of money or property to government officials

For more details on each of these transactions go to  https://www.irs.gov/charities-non-profits/private-foundations/acts-of-self-dealing-by-private-foundation.

Private - Organizations that apply for tax-exempt status cannot serve the private interests or private benefit, of any individual or organization besides itself past an insubstantial degree. Therefore, a nonprofit may not permit any of its income or assets to benefit insiders, such as board members, officers, directors, and important employees.

Public - Board members cannot profit from the activities of a nonprofit, such as receiving a percentage of income or profits as a bonus. Many nonprofits require that board members sign a conflict-of-interest statement to prevent them from hiring friends, relatives or business associates, offering contracts to these people’s companies or voting on issues that would result in a financial benefit to themselves.

Sources: 

http://www.irs.gov/charities-non-profits/?id=136459,00.html

https://www.nonprofitexpert.com/nonprofit-questions-answers/public-versus-private/

https://www.501c3.org/public-charity-vs-private-foundation/

https://cullinanelaw.com/difference-between-public-charity-and-private-foundation/

https://learning.candid.org/resources/knowledge-base/private-foundations-vs-public-charities/