Public and Private Funding

As your board and consultants develop a fundraising plan, begin breaking down how you would like to spend the money (operations, capital development, staffing, programming, etc.), and where you intend to raise it. You have two clear choices: public financing or private financing.

The IRS has already helped you a little bit by mandating that a minimum amount — one-third — of your total income must come from public sources. As you sketch out your fundraising plan, begin with that number.

For example, if your overall projected budget is $60,000, you must show that at least $20,000 came from public sources and the remaining $40,000 from private or nonpublic sources. Show hard numbers representing these percentages in the preliminary budget you provide as part of your application for tax exemption and then stick to it in the future. The IRS monitors a new 501(c)(3) organization for five years to make certain it is indeed operating as a public charity and is securing at least the minimum percentage of its operating budget from public sources.

On a basic level, public funding can be broken down as:

  • Government funding

  • Funding from other public charities

  • Other

  • Government Funding

    Government funding can include any level of government, from federal to local, and any agencies within those levels. It can include everything from arts commissions and education departments to public service agencies and municipal humane societies. If the entity receives funds from taxes and has as part of its purpose the requirement to fund activities of nonprofit organizations, it falls under this umbrella. Of course, to learn what government grants are available is a tremendous task; begin by researching agencies you know have a connection to your particular mission.

    Tap into the many listservs and newsletters maintained by the agencies and departments you work with to understand their funding cycles and application deadlines and to get a general feel for what may be available to you as a new nonprofit.

    Foundation Funding

    Securing funds from other charities is considered public funding when it involves another nonprofit organization whose purpose is to contribute funds to organizations such as yours.

    Since the funding organization is operating as a tax-exempt charity and also raised its money, its funds to you are considered public for the purpose of this discussion.

    Other Funding Sources

    Other public funding might include members of the general public acting as individual contributors, income derived from membership fees, or gross receipts for services directly related to the mission or the tax-exempt function. Box office revenue from public events sponsored by an exempt arts organization is another example of public funding.

    Examples of Private Funding

    Private funding will come primarily from corporate entities and private endowments, particularly at the start-up phase. In return, these contributors will receive good publicity and that ever-important tax deduction. Corporate support often takes the form of advertising (either at your events or in publications), which brings the donor valuable publicity and helps your organization secure much-needed funds.

    You may come across the term supporting organization, with the IRS classification of 509(a). A supporting organization is a public charity whose sole charitable purpose is to support another exempt organization — in almost all cases, another public charity. The phrase can cover a wide variety of organizations from endowment funds for universities to entities that provide essential services for hospital systems. It is worth researching these organizations to see if their mandate includes funding nonprofits like yours.

    Many larger corporations have a charitable arm, often identified as a foundation, whose purpose is to assist nonprofits in their service area or in the community where their employees live. Identify those corporate-sponsored foundations and begin to develop the relationships you will need when their application cycle comes around.

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