A private foundation is a nonprofit organization whose directors and officers and their relatives are primary financial supporters of the organization. OR The directors and officers are insiders (family members or business associates) that wish to retain control of the nonprofit. (Otherwise, the IRS requirement is that a majority of the directors must be un-related by family or business, and officers cannot be related.
The IRS divides the nonprofit world into two groups—private foundations and public charities. You are assumed to be a private foundation unless you can show that you are supported in large part (at least one-third) by the general public (rather than the directors, officers, and their families). If the plan for your organization calls for general public support, you have 5-7 years to prove that indeed this is where your support comes from. Even though the directors and officers and their families give most or all of the money in the beginning (“seed money”), you can still be considered a public charity during the 501c3 application process. DO NOT CHECK THE PRIVATE FOUNDATION BOX and pay the additional $200 if your long-term plan is for public support even though you are putting in all or most of the money in the beginning. However, you can bring in unlimited amounts of public charity money and still be a private foundation if you wish, for example because you want your board to be primarily of individuals related by family or business. BUT unless your private foundation will be giving its money to other 501c3’s (like the Bill and Melinda Gates Foundation), you will be a “Private Operating Foundation” (please see below).
HERE’S WHAT THE IRS HAS TO SAY ABOUT PRIVATE FOUNDATIONS:
***Private foundations: Organizations that are exempt under section 501(c)(3) are private foundations unless they are: churches, schools, hospitals, governmental units, entities that undertake testing for public safety; organizations that have broad financial support from the general public; or organizations that support one or more other organizations that are themselves classified as public charities.
***Public charity: Organizations that are exempt under section 501(c)(3) and are not private foundations because they are: churches, schools, hospitals, governmental units, entities that undertake testing for public safety; organizations that have broad financial support from the general public; or organizations that support one or more other organizations that are themselves classified as public charities. Public charity status is a more favorable tax status than private foundation status.
***Private operating foundation: A type of private foundation that lacks general public support (although it can have public support, even be supported entirely by public support), but makes qualifying distributions directly for the active conduct of its educational, charitable, and religious purposes. “Directly for the active conduct” means that the distributions are used by the foundation itself to carry out the programs for which it is organized and operated. Grants made to assist other organizations or individuals are normally considered indirect. (Private operating foundations incur an additional fee of $600 and may require a CPA or other accounting professional.)
Stated another way, the private foundation typically makes grants to other 501c3’s, who perform a nonprofit mission, whereas the private operating foundation, on the other hand, performs the nonprofit mission itself.