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.
You will see both spellings, nonprofit and non-profit; they mean the same thing. Unlike for-profit entities, such as a for-profit corporation, a nonprofit organization operates to serve the public good (or its members) instead of generating profit for owners. It can still bring in more than it spends, but the surplus stays in the organization and goes back into its mission. Most nonprofits organized as corporations are overseen by a board of directors that is responsible for keeping the organization on mission.
So when people compare an organization vs a foundation, the real question is usually how the 501(c)(3) is funded and controlled. A public charity draws broad public support, while a private foundation is typically funded by one person, family or company. That difference drives the tax rules below.
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 vs charity at a glance
| Public charity | Private foundation | |
|---|---|---|
| Main funding | Many donors, grants and program revenue | Usually one family, person or company |
| Typical activity | Runs programs directly | Mostly makes grants to other charities |
| Donor deduction limit for cash | Up to 60% of AGI | Up to 30% of AGI |
| Donor deduction limit for appreciated stock | Up to 30% of AGI | Up to 20% of AGI |
| Tax on investment income | None | 1.39% excise tax on net investment income |
| Required payouts | None | About 5% of assets each year |
| Self-dealing rules | Excess benefit rules | Strict self-dealing ban |
| Annual IRS return | Form 990, 990-EZ or 990-N | Form 990-PF |
For more detail, see the IRS page on charitable organizations. You may also find our guide on preparing a nonprofit tax return helpful.
Charity vs nonprofit: what’s the difference?
Every charity is a nonprofit, but not every nonprofit is a charity. “Nonprofit” covers many tax-exempt groups, such as social welfare groups (501(c)(4)), trade associations (501(c)(6)) and social clubs (501(c)(7)). A “charity” usually means a 501(c)(3) organization. Donations to a 501(c)(3) are generally tax deductible, while donations to most other nonprofits are not.
Is a foundation a nonprofit?
Yes. A private foundation is a type of 501(c)(3) nonprofit. The difference is in where its money comes from and the extra rules it follows, not in whether it is a nonprofit.
Types of nonprofits
“Nonprofit” covers many types of organizations. The IRS groups them by the section of the tax code they qualify under. The most common:
| Type | Examples | Are donations deductible? |
|---|---|---|
| 501(c)(3) public charity | Food banks, schools, hospitals, religious organizations | Yes |
| 501(c)(3) private foundation | Family and corporate foundations | Yes, with lower limits |
| 501(c)(4) social welfare organization | Advocacy groups, civic leagues | Generally no |
| 501(c)(6) business league | Trade associations, chambers of commerce | Not as a charitable gift (dues may be a business expense) |
| 501(c)(7) social club | Country clubs, hobby clubs | No |
Churches and other religious organizations are treated as 501(c)(3) public charities automatically and generally don’t have to apply for recognition or file Form 990, although many choose to apply.
Private operating foundation vs. non-operating foundation
Most private foundations are non-operating: they make grants to other charities and must meet the 5% annual payout rule. A private operating foundation runs its own charitable programs, such as a museum, library or research center. It has its own spending test instead of the 5% payout rule, and donors to it generally get the higher deduction limits that apply to public charities.
Nonprofit corporation vs. tax-exempt status
Forming a nonprofit corporation (in California, a nonprofit public benefit corporation) is a state law step. It does not by itself give you tax-exempt status. To be exempt from federal income tax, the organization applies to the Internal Revenue Service on Form 1023 (or Form 1023-EZ for smaller organizations). California exemption is separate: you apply to the Franchise Tax Board on Form 3500, or Form 3500A once you have an IRS determination letter. Until both are approved, don’t assume donors can deduct their gifts.
Nonprofit foundation FAQs
Is a “nonprofit foundation” the same as a private foundation?
Not always. “Foundation” is just part of a name. Many community foundations and hospital foundations are public charities, not private foundations. What counts for tax purposes is how the IRS classifies the organization, which you can check with the IRS Tax Exempt Organization Search.
Can a nonprofit lose its tax-exempt status?
Yes. The IRS automatically revokes exempt status if an organization fails to file its required Form 990 return for three consecutive years. Status can also be revoked for activities that go against the rules, such as campaigning for a political candidate as a 501(c)(3).
Related guides
- How to prepare a tax return for a nonprofit
- ABC trusts and estate planning after the $15M exemption
- Tax planning services
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.