The IRS classifies every 501(c)(3) nonprofit organization as either a private foundation or a public charity. The distinction is based on the organization’s funding sources as well as the activities in which it engages. Your organization’s classification determines the amount of IRS oversight to which it is subjected, as well as its tax reporting requirements.
A private foundation is a 501(c)(3) nonprofit organization with few sources of funding and which makes grants to other charities rather than operating its own charitable services. Private foundations are often funded by a single individual, family, or corporation. A private foundation’s money is controlled by its own trustees or directors, and many of these organizations rely on investment income to fund their activities.
The IRS classifies all nonprofit organizations as private foundations unless a nonprofit proves it meets the requirements to be classified as a public charity.
In contrast to private foundations, public charities receive funding from the public at large. Support can come in the form of donations from individuals as well as grants from the government and private foundations.
To qualify as a public charity, a nonprofit must meet the requirements of section 509(a) of the Internal Revenue Code. Many organizations classified as public charities, such as churches, schools and hospitals, provide services directly to their intended recipients. However, charities can also function in a supportive role, helping other public charities operate programs to provide hands-on service to the public.
In the past, nonprofit organizations were required to undergo a waiting period before the IRS designated them public charities. However, an updated IRS ruling allows a new nonprofit to immediately be classified as a public charity if it can convince the IRS it will have sufficient public support.