A private foundation is an organization that is managed by its own directors and is both nonprofit and nongovernmental. Usually, the principal fund for a private foundation comes from a single source, which may be an individual, family, or corporation. Private foundations use some of their interest income to benefit charitable causes that may be social, educational, or religious in nature. Because the principal fund is not touched private foundations can continue to give grants yearly. In the United States, a private foundation is mostly tax-exempt — it only pays a small yearly excise tax.
An example of a private foundation is the Bill and Melinda Gates Foundation. The two areas of focus for this foundation are improving world health and increasing global literacy. This foundation provides funds to other foundations working in health areas, including vaccines preventing diseases and research on illnesses such as malaria, polio, and tuberculosis. Also, this foundation has provided funds for computers in libraries, early learning programs, and scholarships for post-secondary education. An organization does not have to possess the wealth of the Bill and Melinda Gates to establish a foundation — as long as an individual, family, or corporation has enough money for a working principal fund, a nonprofit foundation in support of specific causes can be established.
There are some very specific tax laws for private foundations. The United States Internal Revenue Code under 501(c)(3) lists the guidelines on what organizations are considered a private foundation. Although private foundations are generally considered tax-exempt, an excise tax of approximately one to two percent is levied on most domestic private foundations.
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Public charities are sometimes confused with private foundations because both are nonprofit organizations and support worthy causes. The Internal Revenue Service (IRS) states that organizations that have a broad public support and make yearly appeals for funds are not considered private foundations. Having funding from one primary source is a key distinction between public charities and private foundations.
Each year, all private foundations must file a Form 990-PF. These forms must also be available for public disclosure. Other documents that a private foundation is required to make available to the public are its application, supporting documents, and letters sent from the IRS.
Creating private foundations allows individuals and families to create lasting legacies. With a charitable foundation, they can support the specific causes of their choosing. Money is usually dispersed from private foundations in the form of grants. People seeking grants can examine the public forms to see which organizations might be willing to help their cause.