Exploring The Three Types of Private Foundations

Many individuals and families contemplate establishing a private foundation as a means to give back to their communities or support causes close to their hearts. By utilizing a foundation, they can make charitable donations, finance initiatives, and back nonprofit organizations. While these objectives can also be achieved through donations to public charities, private foundations offer donors a greater level of control over the utilization of their charitable funds. Donors can actively participate in grant-making decisions, shape the foundation’s mission, and direct resources in alignment with their vision. It is important to note that private foundations come in three distinct types: operating private foundations, non-operating private foundations, and supporting foundations. When discussing foundations, it is crucial to clearly differentiate between private foundations, supporting foundations, and non-operating foundations.

Non-operating foundations:

Also known as private foundations, non-operating foundations primarily fund charitable work carried out by others, typically public charities. They do not engage in conducting charitable programs or directly funding grants. Instead, their main purpose is to provide financial support to public charities. Non-operating foundations are typically funded by an individual, a family, or a corporation, rather than having widespread public financial support. Qualified distributions from these foundations are made to public charities. Private Foundations are subject to the strictest rules on investing, operating and grant making. Including required qualified distributions each year as a percentage of the asset value of the foundation.

Operating foundations:

Operating foundations allocate most of their resources to actively conducting programs that directly benefit the public. They primarily operate their own charitable programs, although they may also provide grants to public charities (though those are not considered qualifying distributions). Operating foundations are required to conduct charitable programs, such as education, research, social programs, and others like those carried out by public charities. One advantage of operating foundations is that they follow the rules applicable to public charities, rather than the stricter rules that apply to private foundations. While they are funded like private foundations, many private operating foundations have a broad base of support, including individuals and organizations outside of the immediate family.

Supporting foundations:

Supporting foundations are foundations exclusively organized and operated to support one or more public charities. These foundations may be exempt from filing annual returns with the IRS if they meet specific criteria and are treated as public charities. Although they are independent from the supporting public charity, the public charity must have some level of control over the supporting foundation, such as the ability to appoint board members. In exchange for this control, the supporting foundation can rely on the public charity for its administrative and operational needs.

In summary, non-operating foundations primarily fund charitable work done by others, while operating foundations actively conduct programs that directly benefit the public. Supporting foundations are a type of private foundation organized and operated exclusively to support one or more public charities. Keep this in mind when considering funding a private foundation.