People often use “nonprofit,” “charity” and “foundation” as if they mean the same thing. However, for tax purposes, the key difference is between a public charity and a private foundation. Both are usually nonprofits exempt under Section 501(c)(3). Still, they differ in funding, rules and tax treatment. Here is a simple guide to nonprofit vs foundation.
What is a nonprofit?
A nonprofit is an organization that uses its income to pursue its mission rather than to benefit owners or insiders. Many nonprofits qualify as tax-exempt charities under Section 501(c)(3). For example, they may serve religious, educational, scientific or charitable purposes. Every 501(c)(3) organization is classified as either a public charity or a private foundation.
Public charities
A public charity gets broad financial support from the public. Its funding may come from many individual donors, government grants, other charities or program fees. Examples include most schools, hospitals, food banks and community groups.
Public charities usually run their own programs. They also face fewer restrictions than private foundations. In addition, donors can generally deduct cash gifts up to a higher share of their income.
Private foundations
A private foundation is a 501(c)(3) organization that doesn’t qualify as a public charity. Usually, one family, individual or company provides most of its money. The foundation typically invests that money and uses the income to make grants.
Private foundations come in two main types:
- Non-operating foundations mainly make grants to other charities. This is the most common type.
- Operating foundations mainly run their own charitable programs.
Extra rules for private foundations
Because a small group controls them, private foundations face stricter rules. For example, non-operating foundations must generally distribute about 5% of their assets each year. They also pay an excise tax on net investment income. In addition, strict rules limit dealings with insiders. Finally, they file Form 990-PF.
Nonprofit vs foundation at a glance
| Public charity | Private foundation | |
|---|---|---|
| Main funding | Broad public support | One family, person or company |
| Typical activity | Runs its own programs | Makes grants (most common) |
| Annual return | Form 990, 990-EZ or 990-N | Form 990-PF |
| Extra rules | Fewer | Payout rules, excise tax, self-dealing limits |
For more detail, see the IRS page on charitable organizations. You may also find our guide on preparing a nonprofit tax return helpful.
Get help choosing the right structure
The right structure depends on your goals and funding. To discuss your plans, call (415) 842-2940 or book a free 15-minute call.