Filed under: Charitable Donations, Charitable Gift Planning, Foundations, Not-for-Profits
October 7, 2024
Whether you are an individual considering a more meaningful philanthropic impact or an existing charitable organization looking for a different way to make a change, there is no one-size-fits-all model with charitable entities. Each entity type comes with its own set of advantages and drawbacks. When considering a charitable entity, a careful assessment of the unique circumstances and charitable aspirations is necessary to determine the most suitable organizational form.
Factors such as the charitable mission, the geographical range of planned activities, potential funding sources, and the level of control and flexibility desired by the founders all contribute to choosing the optimal charitable model. Also, the regulatory environment, including tax laws and reporting requirements, significantly affects the decision-making process, as it can impact both the viability of activities and growth of the organization.
Often organizations or individuals approach us with their mind set on which entity they desire since it works well for a peer organization or a colleague. However, once we look at their specific goals and needs, sometimes a separate entity isn’t necessary. Other times the answer may be to keep it in a for-profit entity to retain control and benefits of ownership. A careful approach is needed in each situation to ensure the chosen model maximizes impact, allows for a desired level of involvement by the founders, and supports the organization’s evolution over time as it responds to changing needs and opportunities within the philanthropic landscape.
Below is a summary of five of the most common charitable funding models. Not covered below is the fiscal sponsorship model. This can also be a good choice for a short-term project or a way to incubate an activity to see if independent public charity status is an option. The analysis for fiscal sponsorship depends on the fiscal sponsorship agreement.
As always, contact an attorney or tax advisor before making your final decision to ensure there are no unexpected consequences for your unique circumstances. If you are ready to assess your charitable plans or want to learn more, connect with our knowledgeable advisors for next steps.
Choice of Entity Matrix
| Private Foundation – Nonoperating | Private Operating Foundation | Public Charity | Supporting Organization | Donor Advised Fund | |
|---|---|---|---|---|---|
| Common Activities | Generally makes grants to other entities | Conducts is own active programs. May make grants but these only benefit the POF test if they are for the POF’s active programs. | Grantmaking or program services, funded through public donations or fees for service | Grantmaking or program services, typically funded through a single source and generally subject to restrictions of the supported organization | Makes grants to other entities through advisory privileges of the fund’s advisors |
| Charitable Deduction Percentage for Individuals | 30% AGI limit for cash gifts; 20% AGI limit for noncash gifts (closely held assets limited to lower of basis or FMV; marketable securities at FMV) | 50%/60% AGI limitation for cash donations; 30% AGI limitation for noncash gifts (closely held stock and long-term capital gain property at FMV) | 50%/60% AGI limitation for cash donations; 30% AGI limitation for noncash gifts (closely held stock and long-term capital gain property at FMV) | 50%/60% AGI limitation for cash donations; 30% AGI limitation for noncash gifts (closely held stock and long-term capital gain property at FMV) | 50%/60% AGI limitation for cash donations; 30% AGI limitation for noncash gifts (closely held stock and long-term capital gain property at FMV) |
| Control and Governance | Can have optimal control. May have one trustee (if a trust) or two board members (if a corporation). | Can have optimal control. May have one trustee (if a trust) or two board members (if a corporation). | Should have a diverse board. Family and business relationships are disclosed. Governance practices are highlighted. | Varying levels of control by the SO depending on SO status. Family and business relationships are disclosed. Governance practices are highlighted. | No control, just “advisory” privileges. Disclosures for family, business, and governance relate to the DAF sponsor, not the DAF itself. |
| Donor Disclosure | Donor names disclosed to the public | Donor names disclosed to the public | NO disclosure of donor names to the public | NO disclosure of donor names to the public | NO disclosure of donor names to the public |
| Tax Compliance Filing | Form 990-PF | Form 990-PF | Form 990, 990-EZ or 990-N | Form 990 or 990-EZ | No tax return filing (included within DAF sponsor’s Form 990) |
| Qualification Method | Default status is private foundation. Annual payout required. | 3-out-of-4 year test or 4-year aggregate test | 5-year ramp up period to meet the public support test | Default status is public charity | Default status is public charity |
| Can it Grant to a Non-(c)(3) Entity? | Yes, as long as the activity is charitable. Must exercise expenditure responsibility. | Yes, as long as the activity is charitable. Must exercise expenditure responsibility. | Yes, as long as the activity is charitable. No expenditure responsibility required. | Yes, as long as the activity is charitable. No expenditure responsibility required. | Yes, as long as the activity is charitable. DAF sponsor must exercise expenditure responsibility. |
| Can it Receive a Grant From a Private Foundation? | Yes. Expenditure responsibility required and out-of-corpus election. | Yes. Expenditure responsibility required. | Yes. NO extra due diligence required. | Yes. NO extra due diligence required. | Yes. NO extra due diligence required. |
| Subject to Excise Tax? | Yes, 1.39% tax on net investment income | Yes, 1.39% tax on net investment income | NO tax on net investment income | NO tax on net investment income (unless a Type III NFI-SO) | NO tax on net investment income |
| Annual Payout Requirement? | Yes, approximately 5% of the value of non-charitable use assets | Yes, calculated through the private operating foundation test (can be as low as 3.33%) | No, but must meet the 33.3% public support test | No, and no public support test (unless a Type III NFI-SO) | No (DAF sponsor must meet public support test but DAF itself does not) |
| Pros | Ultimate control. Name recognition. | Ultimate control. Name recognition. Same charitable contribution deduction limits as public charities. May have a lower payout requirement than nonoperating foundations. | Often the optimal funding vehicle. Not subject to PF regime and prohibitions. Can wholly own a business. Can do lobbying. | No payout or public support test requirement. | Immediate charitable contribution deduction for donors. No annual tax return filing. Easy to open and close the fund. No payout requirement. May allow for anonymity in grantmaking. |
| Cons | Subject to PF regime and prohibitions. Lower charitable contribution deduction than POF or PC. Other PFs may not want to grant to it. | Subject to PF regime and prohibitions. Other private foundations may not want to fund the POF or understand what a POF is. | May have to give up control for expanded governance. Meeting the annual public support test. | Lack of control. Activities are often limited to supporting those of the supported organization. | Lack of control. DAF sponsor may have restrictions on certain types of allowable grants (for-profit grantees, overseas grantees, individual grantees, etc.). |
© Clark Nuber PS, 2024. All Rights Reserved.