The Differences Between Public Charities and Private Foundations

by | Nov 26, 2018 | Not-for-Profit, PKF Texas - The Entrepreneur's Playbook®

Jen: This is the PKF Texas Entrepreneur’s Playbook. I’m Jen Lemanski, and I’m back again with Annjeanette Yglesias, one of our tax managers and a member of our not-for-profit team. Annjeanette, welcome back to the Playbook.

Annjeanette: Thanks, Jen. It’s good to be here.

Jen: So, not-for-profit… you work with different organizations, and I think the most popular type of not-for-profit organization is 501(c)(3), correct?

Annjeanette: Yes, that’s correct. There are over 30 different types of nonprofit organizations, according to the internal revenue code, and 501(c)(3) organizations are definitely the most popular. Those organizations have purposes for educational, scientific, religious, prevention of cruelty to animals—those types of organizations fall within 501(c)(3).

Jen: So, are there any limitations that we need to be aware of for not-for-profit organizations?

Annjeanette: Well, that really depends. 501(c)(3) organizations can fall into two categories: either a public charity or a private foundation. Private foundations definitely have more restrictions associated with them than public charities do.

Jen: So, there’s different tax rules for each type of entity, correct?

Annjeanette: That’s correct, and the tax rules depend on whether the 501(c)(3) is a public charity or a private foundation, because private foundations have more restrictive activity rules than public charities do.

Jen: And what type of restrictions are there?

Annjeanette: For example, the IRS requires that private foundations distribute a certain amount of their funds annually, and, also, private foundations are subject to a 1% to 2% excise tax on their net investment income. Those two rules are not applicable to public charities. Also, private foundations are restricted in the amount of voting stock that they can hold in a private company, as well as there are several rules that the IRS imposes regarding self-dealing and self-dealing really deals with substantial contributors and any interested persons of the organization.

Jen: So, does the 990 come into play? I would assume that they know the different limitations, but that’s where they call you, right?

Annjeanette: That’s right. If any organization has a question on if they have to follow any of these restrictions, they can certainly call us, and we can walk them through it.

Jen: Perfect. Well, it sounds like there’s a lot more to talk about, and we’ll get you back.

Annjeanette: Sounds good.

Jen: To learn more about how PKF Texas can help your not-for-profit organization, visit PKFTexas.com/notforprofit. This has been another Thought Leader production brought to you by PKF Texas The Entrepreneur’s Playbook. Tune in next week for another chapter.

Stay Connected