While all three are considered nonprofit organizations and will often obtain the same 501c3 tax exempt status, each of these categories is distinctive. The IRS also has different guidelines that it looks for to distinguish each one, so it’s important to understand what these guidelines are and which one best fits your nonprofit. This is why many nonprofits hire a consulting agency that specializes in 501c3 startups.
We’ll start with the most common type of nonprofit – the public charity. Public charities are what most people think of when they hear about charities or nonprofit organizations. In the eyes of the IRS, there is one key factor that separates a public charity from the other categories: the IRS has a strong expectation that a public charity will receive its funding through public donations and fundraising activities. If the majority of an organization’s funding comes from its own members or from a select few individuals, this is certainly going to raise a red flag with the government and likely disqualify the organization as a public charity.
Donating to a public charity does allow for a tax write-off for the donor, with some limitations. For example, an individual person can donate up to 50% of their income without being taxed on it. A corporation is allowed to donate up to 10% of it’s revenue without being taxed. Some common public charities you may know of include food banks and local animal shelters or rescues. These nonprofits have what are called “active programs”. For example, the food bank will implement food drives and fundraisers for operating costs, and animal shelters will usually include a program for pet adoptions.
Private Foundations is where we start to steer away from the public, move to more private organizations, but still remain a 501c3 nonprofit organization. Unlike public charities that have active programs, private foundations do not. This means that the funding for these nonprofits usually comes from a targeted group of donors, or in many instances a single family or individual.
Private foundations typically have a singular purpose for their funds. The largest private foundation in the United States is the Bill and Melinda Gates Foundation. These foundations often use the money donated to them for use in the form of grants for programs or other activities that align with the foundation’s purpose. For example, a foundation funded by a single family that was created for the purpose of bringing clean water to under-developed areas may provide a grant to a different company that is developing technology to help with that same purpose.
Private Operating Foundations
Private Operating Foundations are kind of a “hybrid” between public charities and private foundations. The word “operating” in the title refers to the fact that these foundations do have active programs (remember that private foundations do not). They often receive significant funding from certain individuals or groups, but also have the ability to raise funds through the general public.
Examples of private operating foundations include: museums, zoos, libraries, and even research facilities. What sets these organizations apart from private foundations is that they often have programs that are in some way charitable, educational, or provide a public service. While a zoo will house animals that often can’t survive in the wild on their own due to injuries, illness, or being born in captivity, they also provide extensive programs and activities to educate people of all ages about animals.
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