Many people are anxious to create a nonprofit organization in order to help their community and the overall general public. But, knowing how to help people, and knowing how to create a nonprofit organization in order to help people, are two separate and completely different (yet both necessary) sets of information that a person should be aware of.
One of the numerous bits of information that a person needs to know about nonprofit organizations is the difference between a public charity and a private foundation and what the aspects are of each. The following is a brief outline of each of the two entities.
A public charity is a Section 509(a) organization that falls under Section 509(a)(1), 509 (a)(2), or 509(a)(3). The benefits of a public charity is that it is allowed more operational freedom than a private foundation and that is has no self-dealing restrictions. Also, a public chairty does not have any minimum distribution restrictions and no excess business holding restrictions.
However, the disadvantages of a public charity is that they receive a tax deduction of 30% of the donation (instead of the 50% amount that a private foundation receives). Also, a public charity is subject to excise taxes on prohibited transactions and does not serve the common good because it lacks an approved exempt purpose.
A private foundation is an operating foundation or a non-operating foundation that satisfies one of the following: (1) it has only one donor, (2) it has endowment income, (3) it is a supporting organization and erceives less than 10% of its support from the government or general public, or (4) its articles of incorporation state that is complies with the minimum distribution requirements of Section 4942 and is prohibited from engaging in self-dealing transactoins, excess business holdings, and taxable expenditures.
The benefits of a private foundation is that it provides a 50% charitable contribution deduction limitation and it does not lack an approved exempt purpose. The disadvantages of a private foundation is that it is subject to the self-dealing, excess business holdings, and taxable expenditure limitations and restrictions. Another disadvantage of a private foundation is that the foundation cannot engage in a transaction with any disqualified person, such as a substantial contributor, related organization, or a family member.
The distinction between a public charity and a private foundation might seem insubstantial and somewhat confusing, but the difference is very important because each entity provides very different benefits and come with very different sets of rulse and restrictions.