Legal Framework

Private foundations must adhere to a legal framework to ensure that they serve a charitable purpose and are not abused by managers or substantial contributors who may seek to derive excess benefit.

Payout rate

A private foundation must yearly spend at least 5% of the endowment fund on charitable and administrative purposes. Should a private foundation exceed this payout rate then the private foundation may reduce the taxes on their investment income from 2% to 1%.

Excess benefit

Disqualified persons may not derive excess benefit from the private foundation. Should they derive excess benefit in the form of favorable loans or control over the private foundation then they may be subject to the intermediate sanctions, which punishes not the private foundation but the manager and the contributor.

Excess business holdings

Generally, the combined holdings of a private foundation and all of its disqualified persons are limited to 20 percent of the voting stock in a business enterprise. A private foundation that has excess business holdings in a business enterprise may become liable for an excise tax based on the amount of the excess holdings.

http://en.wikipedia.org/wiki/Private_foundation_%28United_States%29#Legal_framework