Foundations, charities, and nonprofits are all distinct organizational structures, but share one key commonality: all three qualify for 501(c)(3) tax-exempt status if they serve an approved charitable purpose.
All charities are nonprofits, but not all nonprofits are charities. Nonprofits also include community-based organizations like local recreation departments, chambers of commerce, and volunteer fire departments.
A private foundation is typically funded by a single large endowment and exists to distribute grants to other organizations, whereas charities and nonprofits receive ongoing donations and grants to directly pursue their own missions.
One practical distinction for foundations is a legal requirement to distribute at least 5% of their assets annually, a spending rule that does not apply to charities or nonprofits.
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: “ is the portion of the US Internal Revenue Code that allows for federal tax exemption of nonprofit organizations, specifically those that are considered , or . 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 :
Beyond fitting into one of the aforementioned categories, foundations, nonprofits and charities must also 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 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 , also set by the IRS:
Lastly, a 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.
Donations to private foundations are generally subject to lower deduction limits than donations to public charities and nonprofits. Cash contributions to a private foundation typically cap out around 30% of a donor’s adjusted gross income, compared to a considerably higher limit for gifts to public charities. This difference is one of the practical reasons many donors favor giving directly to charities and nonprofits over foundations.
Private foundations file Form 990-PF, a more detailed filing that discloses investment holdings, grants made, and compensation for officers and directors. Public charities and most other nonprofits file the standard Form 990 or, for smaller organizations, Form 990-EZ. The more detailed reporting requirement for foundations reflects their more concentrated funding structure and stricter operating rules.
A private operating foundation is a hybrid structure that directs most of its income and assets directly into running its own charitable programs, rather than distributing grants to other organizations the way a standard private foundation does. Because of this direct programming role, private operating foundations are treated more like public charities for certain purposes, including more favorable donor deduction limits, while still following some of the stricter rules that apply to private foundations generally.
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