Back To: BUSINESS ENTITIES, CORPORATE GOVERNANCE, & OWNERSHIP

What is a Private Foundation?

A private foundation is a non-profit organization that executes charitable projects to serve a good cause. This foundation is a non-governmental organization, otherwise called a charitable organization whose projects and finances are managed by its trustees or directors. The principal fund or primary donation of a private foundation comes from a single source, which can be a household, an individual or a corporation. Despite the charitable projects done by a private foundation, it is not the same as a public charity. A private foundation is called a 501(c)(3) organization by the Internal Revenue Service (IRS), this foundation is non-profit is is thereby tax exempt.

How is a Private Foundation Used?

A private foundation does not source funds from the public, rather, the primary fund or donation is invested in order to generate more funds with which its charitable projects are funded. The dividends or returns the initial donation (through investment), generates every year are used for financing different charitable activities of the foundation. Usually, private foundations are small organizations established for the purpose of serving a good cause. In the United States, the Bill & Melinda Gates Foundation is the Largest private foundation. There are other foundations with billions of dollars as assets.

IRS Classification

The IRS categorizes private foundations as 501(c)(3) organizations given that they enjoy tax exemption under section 501(c)(3). Not all private organizations belong to this category, there are some clear cut criteria that a private organization must meet before it is classified as a 501(c)(3) organization by the IRS. for example, private hospitals, schools, and businesses that use some parts of their earnings to fund god causes are not 501(c)(3) organizations. There are basic requirements that an organization must meet before the IRS treats them as 501(c)(3) organizations. The requirements are contained in section 501(c)(3) of the Internal Revenue Code. Despite that private foundation in the United States are tax-exempt, they are subject to excise tax which they pay on their net investment income. The IRS also levy taxes on foreign private foundations whose gross investment income comes from the United States. The IRS regulates the activities of private foundations and places certain restrictions on them. A private foundation that acts for personal interests rather than serving good cause can be restricted by the IRS.

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