Types of Private Foundations

IRS classifies private foundations into two broad types: closed hands

  1. Private operating foundations
  2. Grant making foundations

Private Operating Foundations

Nonprofit private foundations that run charitable programs directly with the beneficiaries are called private operating foundations

Private operating foundations do not make grants to outside organizations or individuals. Grants, if any are direct gifts to beneficiaries.

Private operating foundations normally begin their operation using contribution from a small group of members. This initial fund is called the seed-fund or the original endowment. Funds are not raised from the general public.

To meet its operational expenses, a private operating foundation relies on the returns it generates by investing the seed fund or the original endowment.

When a nonprofit organization applies for tax-exempt status, the IRS presumes that the organization is a private foundation unless it qualifies the income test as a public charitable organization status.

Grant making foundations

Grant-making foundations are also referred to as private non-operating foundations. These are entities that give money to other charitable organizations and do not carry out their own charitable activities.

If your organization is not a private operating foundation, chances are that it will be classified as a grant making foundation.