Foundations, charities and nonprofits share many of the same characteristics — they’re philanthropic, rely on donations, support community and public interest initiatives, and more. Given their similarities, there is often confusion surrounding the three. But, each has its own unique function and structure, which are important distinctions for both those looking to support them and those looking to work for them. So, what should you know about foundations vs. charities vs nonprofits?
Setting aside all specific missions and functions of non-profit organizations, foundations and charities they share a singular similarity — they are all tax exempt. More technically, this is known as being a 501(c)(3) organization, and entitles foundations, charities and nonprofits to certain privileges they wouldn’t otherwise have.
There are qualifications any organization must meet to gain 501(c)(3) status, but first, it’s best to understand what it is, according to the Foundation Group: “Section 501(c)(3) is the portion of the US Internal Revenue Code that allows for federal tax exemption of nonprofit organizations, specifically those that are considered public charities, private foundations or private operating foundations. It is regulated and administered by the US Department of Treasury through the Internal Revenue Service.”
To qualify for tax-exempt status, organizations must exist exclusively for any of the following charitable purposes, as defined by the IRS:
Beyond fitting into one of the aforementioned categories, foundations, nonprofits and charities must also abide by the following rules to retain their 501(c)(3) tax exemption. “The organization must not be organized or operated for the benefit of private interests, and no part of a section 501(c)(3) organization’s net earnings may inure to the benefit of any private shareholder or individual. If the organization engages in an excess benefit transaction with a person having substantial influence over the organization, an excise tax may be imposed on the person and any organization managers agreeing to the transaction.”
Interestingly, foundations can include both charities — in the form of charitable trusts — and nonprofit organizations, but foundations are created to monetarily support other organizations. A private foundation is defined as, “a nonprofit charitable entity that is generally created by a single benefactor, usually an individual or a business. Using this initial seed donation, known as an endowment, an investment is made to generate income, which is then dispersed in the form of grants to individuals or other charities in accordance with the foundation’s charitable purpose.”
There are many types of private foundations, and they serve wide ranging purposes from education initiatives to disease research. Examples of private foundations include:
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The IRS defines charities as “organizations that are organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, educational or other specified purposes.”
There is a gray area surrounding what exactly a charity is, as all charities are also technically nonprofits. For our purposes, it is easiest to think of a charity as an organization created to raise money to help those in need. Much like foundations, charities serve a number of missions, and they also must meet specific criteria, also set by the IRS:
Lastly, a nonprofit organization is defined as an organization “that is not driven by profit but by dedication to a given cause that is the target of all income beyond what it takes to run the organization.” Nonprofits have a similar structure to foundations and charities — in fact, nonprofits are charitable organizations, just with a specific goal or mission behind them. Think of nonprofits as organizations working towards a cause, such as reducing hunger in a community or protecting endangered species in a region.
Nonprofits also encompass community-based organizations that direct funds toward their operating budget, rather than to earning a profit. That means that local recreation departments, chambers of commerce or even volunteer fire departments are nonprofit organizations.
A private foundation is a nonprofit charitable entity that is generally created by a single benefactor, usually an individual or a business, that distributes grants to individuals or other charities in accordance with the foundation’s charitable purpose.
Broadly, a charity is an organization created to raise money to help those in need. Charities are established to support causes and initiatives with specific missions.
An organization, with a charitable mission, that is not driven by profit but by dedication to a given cause that is the target of all income beyond what it takes to run the organization.
Foundations, charities and nonprofits — if they qualify — have 501(c)(3) tax status, which affords them tax exempt status and makes donations to these organizations tax deductible.
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