The Internal Revenue Code distinguishes between nonprofit entities that are public charities and those that are private foundations. A public charity is one that has involvement from the public in general, earns financial support from the public in general, or has an operating relationship with a public organization. By comparison, a private foundation usually derives its financial support from one source; earns money through investment assets, rather than through contributions from the public; and makes grants to other charitable organizations instead of operating its own activities.
Private foundations are subject to certain restrictive rules and taxes for which public charities are not subject. Thus, those who form nonprofit organizations often would like to avoid the status of a private foundation. Several types of institutions are exempted from the rules governing private foundations. These institutions include certain churches, educational institutions, health care providers, and govern-mental units.