What’s a Private Operating Foundation?

When you submit your nonprofit organization for tax exemption, you have to choose how to file it with the IRS. Your application reflects your nonprofit’s organizational structure, how you earn money, and what you do with it.

There are three main types of nonprofit structure that the IRS recognizes: Public Charities, Private Foundations, and Private Operating Foundations.

So what is the difference between the three, and how can you figure out which one applies to you? Let’s break down the key differences here:

Public Charity

Most nonprofits are considered a Public Charity. Public Charities exist to help their communities with direct acts and services. Public Charities are funded by donations. In order to be considered a Public Charity, at least one third of all donations received in a year have to be from individuals or other Public Charities – not from major donors or corporations.

Public Charities also have restrictions on how many of the Board can be directly-related family members. Since they serve the community, they are intended to be made up of different community members, not just one family. However, since they serve the community, there is no cap on the amount of donations they can – or have to – give out in a year.

Private Foundation

A Private Foundation exists primarily to fund Public Charities, rather than to operate direct acts and services. It does good by giving money to Public Charities, who in turn help their communities directly. Private Foundations are primarily funded by one single person or organization. However, Private Foundations can be owned by anyone, including families.

Private Foundations have to give away at least a set amount of their assets every year. That’s right, their private assets – not cash. That can be more complicated to run than a Public Charity, although it allows you to do good in a different way.

Private Operating Foundation

A Private Operating Foundation mixes elements of both Public Charities and Private Foundations. Private Operating Foundations exist to help their community with direct acts and services, like a Public Charity. They cannot give away any of their funding to other nonprofits like a Private Foundation does.

However, a Private Operating Foundation can be funded by a single donor or organization, like a Private Foundation is. Similarly, there are no restrictions placed on the organization’s leaders, meaning it can be composed of family members. Private Operating Foundations receive money the same way as Private Foundations, but use its money the same way as Public Charities.

Which One is Right For You?

A nonprofit structure is not inherently good or bad. They all have their advantages and disadvantages. They also all face different tax implications from the IRS. The IRS has tests nonprofit owners can take to determine what structure their existing business falls under. If you are just starting your nonprofit, choosing a structure depends on your goals and your size. To determine the right structure for you, consult with an attorney.

How To Get Started

At Concerto Law, we focus on practical advice for nonprofit organizations.

If you are trying to determine which structure is right for you, contact Concerto Law today! We offer legal solutions that break through the noise of bad internet advice.