Foundation Establishment & Management

“We make a living by what we get, but we make a life by what we give”
Winston Churchill

Foundations play a vital role in philanthropy, enabling individuals, families, and organizations to support causes they care about. They generally fall into two main categories: public foundations and private foundations. While both share the overarching goal of funding charitable work, they differ significantly in their rules, operations, and governance.

Here is a breakdown of the key distinction and rules for public and private foundations:

  • Public Foundation:  Public foundations are nonprofits that receive most of their funding from multiple public sources, including individuals, corporations and government grants.  They often serve as grant-making entities that support other nonprofits.
  • Private Foundation:  Private foundations are typically funded by an individual, family, or corporation and rely on that primary source for their endowment. They are independent legal entities that make grants to charities or run their own charitable programs.

  • Public Foundation: 

-Must derive at least one-third of its funding from public sources.

-Encourages broad support through donations, grants, and fundraising efforts.

  • Private Foundation:

-Generally funded by a single source or a small group of donors.

-Relies on income generated by it’s endowment for grant-making and operations.

Both types of foundations are tax-exempt under section 501 (c)(3) of the Internal Revenue Code.  However, their rules for maintaining this status vary:

  • Public Foundation: 

-Must pass a “public support test” to demonstrate broad public funding.

-Often enjoys more favorable tax treatment, such as higher charitable contribution deduction limits for donors.

  • Private Foundation:

-Does not need to meet the public support test.

-Subject to stricter tax regulations, including excise taxes on net investment income.

  • Public Foundation:

-Governed by a board of directors or trustees representing the public interest.

-Accountability to a wider group of stakeholders, including donors and the general public.

  • Private Foundation:

-Often controlled by a small group, typically the founding family or corporation.

-Decisions are concentrated, providing more flexibility in operations and grant-making.

  • Public Foundation:

-Primary focuses on awarding grants to other nonprofits.

-May also run programs or services directly benefiting the community.

  • Private Foundation:

-Required to distribute at least 5% of its net investment assets annually for charitable purposes.

-Has greater leeway in funding, including making grants to individuals (e.g.,scholarships) with IRS  approval.

  • Public Foundation: 

-Subject to fewer restrictions on operations.

-Can engage more extensively in lobbying activities, provided these activities align with their mission.

  • Private Foundation:

-Prohibited from engaging in lobbying activities.

-Subject to stricter rules on self-dealing, excess business holdings, and jeopardizing investments.

  • Public Foundation:

-Must file Form 990, which details financial information and public support calculations.

-Increased scrutiny ensures accountability to donors and the public.

  • Private Foundation:

-Must file Form 990-PF, a more detailed report that includes information on grants, investments and administrative expenses.

-Less public engagement but still subject to IRS oversight.

  • Public Foundation Pros:

-A broader funding base reduces financial risk.

-Tax benefits for donors are more generous.

-Greater community involvement and support.

  • Public Foundation Cons:

-Reliance on external funding can be challenging.

-Requires extensive public engagement and transparency.

  • Private Foundation Pros:

-Greater autonomy and flexibility in decision-making.

-Long-term stability through an endowment.

  • Private Foundation Cons:

-Stricter tax regulations and reporting requirements.

-Potential for conflicts of interest if not managed carefully.

©2025

Choosing the Right Structure

The decision to establish a public or private foundation depends on several factors including:

  • The founders goals
  • Funding Sources
  • Desired level of public engagement

Public foundations are ideal for those seeking to mobilize broad community support, while private foundations suit individuals or families seeking control and long term philanthropic impact.

Understanding the rules and regulations governing these entities is essential to ensure compliance and maximize their charitable potential. Both public and private foundations offer unique opportunities to make a lasting difference in society, but careful planning and governance are critical for success.

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