DEFINITION of 'Private Foundation'

A private foundation is a charitable organization that, while serving a good cause, might not qualify as a public charity by government standards. A private foundation is a nonprofit organization which is usually created via a single primary donation from an individual or a business and whose funds and programs are managed by its own trustees or directors. As such, rather than funding its ongoing operations through periodic donations, a private foundation generates income by investing its initial donation, often disbursing the bulk of its investment income each year to desired charitable activities.

BREAKING DOWN 'Private Foundation'

Private foundations generally fit into two categories: private operating foundations and private non-operating foundations. Private operating foundations actually run the charitable activities or organizations they fund with their investment income, while private non-operating foundations simply disburse funds to other charitable organizations.

How Private Foundations are Classified by the IRS

If an organization qualifies for tax exemption per section 501(c)(3) of the Internal Revenue Code, it may be considered to be a private foundation by regulators unless that organization is better classified under a different category that is explicitly excluded from being called a private foundation. Excluded entities, per the IRS classification, include universities, hospitals, or organizations and their support elements that hat hold wide public support.

Private foundations are only tax exempt, and contributions to them are only deductible, is the organization and its governing body meet the requirements of 501(c)(3) of the Internal Revenue Code.

The majority of domestic private foundations are subject to an excise tax on their net investment income. There may also be taxes for some foreign private foundations that draw gross investment income from sources in the U.S.

The IRS also holds private foundations to a number of other requirements and rules to receive and maintain this classification. For instance, there are restrictions on private foundations that bar self-dealing, which is acting for personal benefit rather than for the interests of beneficiaries, between the foundation and substantial contributors. In other words, the administrators of a foundation cannot user their positions to make deals to enrich themselves at the expense of the foundation’s beneficiaries.

Private foundations must distribute income annually for charitable purposes. There are also limits on the private business holdings of such foundations. The investments made by private foundations must also not put at risk the execution of the organization’s exempt purpose. The expenses and assets spent by a private foundation must be towards those purposes.

RELATED TERMS
  1. Philanthropy

    Charitable giving to human causes on a large scale. Philanthropy ...
  2. Going Private

    A transaction or a series of transactions that convert a publicly ...
  3. Private Investment Fund

    A private investment fund is a fund that is not open to regular ...
  4. Private Sector

    The private sector is the part of the economy that is not state ...
  5. Donor Advised Fund

    A private fund administered by a third party and created for ...
  6. Private Equity

    Private Equity is a non-publicly traded source of capital from ...
Related Articles
  1. Managing Wealth

    The 5 Wealthiest Private Foundations

    These huge foundations are dedicated to causes ranging from healthcare to education and the arts.
  2. Insights

    Top Impact Investor: The Ford Foundation

    The Ford Foundation, one of the world's largest philanthropies, has also become a major contributor to impact investing.
  3. Insights

    Buffett Donates $3.17 Bn in Berkshire Stock

    Warren Buffett has donated more than $3 billion to five charities as part of his 2006 pledge to donate all of his fortune.
  4. Managing Wealth

    The Christmas Saints Of Wall Street

    Learn how some of world's richest people spread holiday cheer year-round.
  5. Taxes

    Is The Billionaire Charity Pledge A Good Idea?

    Will Bill Gates' call for billionaires to become more active in charitable giving do all the good it could?
  6. Managing Wealth

    How Billionaires Around the Globe Give Back

    This list of foreign billionaire philanthropists is robust. Here's a list of rich entrepreneurs around the globe who have given back in really big ways.
  7. Taxes

    3 Most Popular Charitable Investment Accounts

    Charitable investment accounts aren't just for the wealthy. There are several options for donors who want to manage their own funds.
  8. Taxes

    How to Optimize Charitable Giving

    Thinking of donating to a charitable organization before year end? Here are some guidelines.
  9. Taxes

    5 steps to forming a tax-exempt nonprofit corporation

    Before you tackle this challenge, know the challenges of forming and operating an official nonprofit organization.
  10. Tech

    How to Donate to Charity Using Bitcoin

    Charitable donations are not just a nobler use for your cryptocurrency than "lambo" – they're also tax-deductible.
RELATED FAQS
  1. Why are private equity investments usually reserved for rich people?

    Learn what investors without a high net worth can do to invest in private equity investments, and discover the benefits and ... Read Answer >>
  2. What are major differences between investment banking and private equity?

    Private equity and investment banking both raise capital for investing purposes, but they do so in very different ways. Read Answer >>
  3. What's the best way to contact Warren Buffett?

    Learn how to contact Warren Buffett and what kinds of contact is most likely to receive a response from him or from his company, ... Read Answer >>
Hot Definitions
  1. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs are often issued by companies seeking the capital to expand ...
  2. Cost of Goods Sold - COGS

    Cost of goods sold (COGS) is the direct costs attributable to the production of the goods sold in a company.
  3. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and expenses incurred during a specified period of time, usually ...
  4. Monte Carlo Simulation

    Monte Carlo simulations are used to model the probability of different outcomes in a process that cannot easily be predicted ...
  5. Price Elasticity of Demand

    Price elasticity of demand is a measure of the change in the quantity demanded or purchased of a product in relation to its ...
  6. Sharpe Ratio

    The Sharpe ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk.
Trading Center