Many of my clients come to me saying, “I want to start a foundation,” but really they are interested in establishing an operating nonprofit. It is quite easy to get confused by terms like foundation, charity and nonprofit when used interchangeably albeit, incorrectly, in philanthropy.
In the United States, we look to the Internal Revenue Code for accurate and legal definitions of private foundations and public charities, also known as nonprofit organizations or NPOs. An individual, family or corporation usually funds the former. The public funds the latter. The bottom line in understanding the difference is where or rather whom the money is coming from.
Private foundations are grantmaking organizations that do not run their own programs; they fund programs, projects or organizations to carry out a mission the foundation’s governing board supports. Private foundations are often established through a thorough estate-planning process. The Bill and Melinda Gates Foundation is an example of a private foundation.
Public charities or NPOs are operating organizations that run programs or provide services to the community. Each state and the IRS requires that a public charity first form a corporation, obtain an Employer Identification Number (EIN), then apply for tax-exempt status known as 501 (c). The rules of what type of corporation to establish may vary state to state, but in California it’s a nonprofit corporation. A 501 (c) status makes donations tax-deductible as well as excludes the nonprofit corporation from income tax obligations and potentially other taxes. The World Wildlife Fund is an example of a public charity.
Both private foundations and public charities are tax-exempt provided they file the necessary paperwork and meet certain requirements. There are a dozen different types of tax exemption statuses, or 501 (c) type organizations, viewable in this online chart. Under the most widely publicized 501 (c) 3 are four other types of sub-classifications known as 509 (a) 1, 509 (a) 2, 509 (a) 3 and 509 (a) 4, which simply refers to the type of public charity.
The philanthropic arena is a highly regulated one. It’s critical to look to wealth advisors, philanthropic advisors (www.starfishimpact.com), tax accountants and attorneys to determine which type of organization is right for you. The best and most simple place to start, is where is the money coming from?