August 6, 2020
Yen-Yi Anderson focuses her practice on excellence in business immigration, commercial law, and civil litigation.
Jim Shih-Chun Hou is an Associate at Anderson & Associates and a contributing author for the Anderson & Associates blog.
You may have heard these two terms from time to time in the context of nonprofit discussion. What are they? How do they work? And how to set up each one of them?
By default, a 501(c)(3) organization will be a private foundation at the very beginning. Generally, a private foundation is funded by one individual or company. For example, Bill & Melinda Gates Foundation, the largest private foundation in the U.S., was founded by Bill Gates and Melinda Gates. Its endowment was $50.7 billion in 2017. A private foundation usually makes grants to other charities from its endowment instead of directly organizing and executing charitable activities.
On the contrary, the financial resource of a public charity is mainly coming from the general public on a regular basis. It heavily relies on donations or grants to operate and achieve its goals. IRS sets out the “33 1/3 percent support test” or the “10 percent facts and circumstances test” to determine if a 501(c)(3) organization can qualify as a public charity. More specifically, at least 1/3 of donations must be given by donors who give less than 2% of the entire organization’s receipts for the past 5 years.
For instance, Anderson Charity has the vision to provide legal aid and education with residents in lower Manhattan. It has been conducting fundraising and receiving donations from a variety of groups and people. As of today, Anderson Charity has received $10,000, which can be broken down as follows:
-$3,582 from the sale of ticket of legal drama show. There were 18 people who purchased the ticket priced at $199.
-$6,418 from 3 different individuals who are previous clients cheering Anderson’s mission. Set aside few exceptions, Anderson Charity can therefore meet and maintain its public charity status.
In short, the most important differences between private foundation and public charity are 1) financial source- from single source or the general public and 2) activities- making grant or executing plan. Some facets are ignored for the purpose of simplicity. Consult your lawyers to learn more details before making strides.
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