Private Nonprofits vs. Public Nonprofits: What You Need to Know
Nonprofit organizations (NPOs) are formed out of a desire to make a difference in the world rather than make a profit. If you’re looking to start a nonprofit, understanding the differences between a public and private organization is an important part of making that final decision.
Both organizations serve a unique purpose and have several different benefits depending on your philanthropic goals. When comparing a private foundation vs. a public charity, it’s important to know which best suits your specific mission. Here are some key considerations about which is right for you to think about before you go any further.
What Is a Private Nonprofit?
A private nonprofit, also known as a private foundation, is a charitable organization. It is predominantly founded and funded by one specific benefactor. However, the benefactor isn’t necessarily acting alone, as private NPOs can be run by a family, corporation or individual.
Private foundations aren’t funded by donations from members of the public. Instead, they operate through grantmaking, financial assistance to other charities and programs related to the NPO’s goals and mission.
What Are the Benefits of Making Your Nonprofit Private?
An aspiring philanthropist may choose to make their nonprofit private for many reasons. Some of the main benefits of making your nonprofit private include:
Control
Private nonprofits have considerable control over the use of funds. A private NPO can choose where to invest finances with complete autonomy. This level of control can help to facilitate clear long-term goals for grantmaking or other charitable matters.
Freedom
A private foundation doesn’t have to seek contributions from members of the public. With fewer external factors to consider compared to public nonprofits, founders can focus on the foundation’s specific objectives. The investment options of a private nonprofit are also less restrictive than public NPOs, meaning that individuals or families can channel their funds into environmental and social schemes.
Straightforward Financial Reporting
Some, but not all, of the financial reporting for a private foundation can be less complicated than that of a public nonprofit. Due to funding from private entities, private NPOs aren’t required to share every last detail of their organization with the public.
What Is a Public Nonprofit?
A public nonprofit organization, also known as a public charity, will use funds donated by the public to achieve its initiatives. A public NPO may rely on donations from communities and use them to provide care, support, and assistance to those in need. The organization may also obtain financial support from grants, private foundations or individuals who believe in its charitable cause.
Public nonprofits will have a board of directors that independently ensures that the charity is not run for private interests. It must be created and operated for one or more charitable purposes, such as:
- Religious
- Charitable
- Literary
- Educational
- Public safety testing
- Children or animal cruelty prevention
- National and international amateur spots competition
Any governing documentation must state this mission and strictly prohibit any practices that don’t benefit this mission.
What Are the Benefits of Making Your Nonprofit Public?
The benefits of making your nonprofit public include:
Diverse Fundraising Opportunities
A public NPO can solicit charitable donations from a broader range of areas than a private nonprofit organization, including companies, grantmakers and members of the general public.
Tax Deduction for Donors
In the private vs. public nonprofit taxes comparison, financial donations to public charitable organizations qualify for the highest tax deductions, making them a more enticing choice for potential donors.
Community Trust
Public nonprofits tend to be more deeply involved in community work than private NPOs. This visibility and dependence on public support can help to form strong relationships with donors.
Filing Differences for Private and Public Nonprofits
When comparing the differences between a private vs. public nonprofit, taxes and filing can be the determining factor for which best meets your organizational goals.
Private Foundations
The control and freedom of a private NPO can pose potential challenges in regulatory adherence. For example, section 4942 of the Internal Revenue Code (IRC) states that a private charitable organization must distribute 5% of its overall assets to charitable endeavors. These assets include administrative costs, grants and other qualifying factors, which can potentially affect how private NPO funds are managed over time.
This rule ensures nonprofits use funds for charitable purposes instead of sitting on growing wealth. Failing to match the 5% annual payout threshold can lead to severe penalties, including a possible tax of 30% of the money not distributed. The foundation may also not qualify for a reduction of excise tax for five tax years.
Other private NPO tax matters to consider are:
- Private NPOs have a less generous tax-deductible incentive than private NPOs
- Private foundation tax deductions are limited to 30% compared to 50% for public NPOS
- Stock and real estate contributions will generally have a limit of 20% which may be a deterrent to donors
- Private nonprofits have an excise tax on the net investment income of the organization
Public Charities
The diverse fundraising options and increased community trust of a public nonprofit come with increased transparency requirements. The public financial support of a public NPO includes more accountability. Public charities are recognized under Section 501(c)(3) as being tax-exempt, which means they are required to file annual reports to the IRS.
This form includes details of the organization’s programs, finances and governance. It has three versions — Form 990, Form 990-N and Form 990-EZ. The version needed for your public NPO depends on its assets and revenue for this financial year.
Additional public NPO filing matters and challenges to take into account:
- Public charities are required to receive more than one-third of their donations from the general public
- Organizational use of financial resources requires clear practices and dialogue with stakeholders
- Public NPOs are not permitted to participate in any kind of public office political campaign
- Filing for a public charity can be extremely detailed and lengthy
Public nonprofits also have to meet the public support test, which means that a large portion of their financial support must come from the general public, public charities or the government.
Let Marshall Jones Take Care of Your Nonprofit Needs
Making a private nonprofit vs. public nonprofit comparison is an important part of making that final decision for your startup organization. When you’ve made that final decision, our team of certified public accountants and advisors is here to ensure your tax and bookkeeping matters are taken care of.
The complex nature of filing differences for both private and public nonprofits can be difficult to manage alone. We will take care of issues like tax and regulatory changes, tax codes or deadlines for peace of mind, letting you focus on running your organization. Connect with Marshall Jones for help navigating all tax and bookkeeping concerns for your nonprofit.
