Charities and public foundations, as defined by the Internal Revenue Service (IRS), fall under the statutory 501 (c) (3) nonprofit framework. They have a similar mission or purpose because they both fund worthy causes.
However, they are very different with regards to the sources of income and the rules of operation within their respective IRS category under the 501 (c) (3) laws.
Public charities, as defined by the IRS, are “publicly funded” nonprofit corporations.
In this category, the IRS lists: religious groups, churches, educational associations, research and scientific organizations, hospitals, medical societies, public safety, amateur sports groups, etc., and much more .
The use of the term public charity is often misunderstood as referring only to a group doing charitable work.
Public charities are nonprofit organizations that are “publicly funded” because they receive funds from many sources. Examples include: personal or public donations, grants, gifts, and fundraising events.
Foundations are also non-profit organizations under the IRS Code and IRS 501 (c) (3). The IRS refers to this classification as private foundations.
Under Section 508 of the IRS Code, all nonprofit organizations are automatically classified as private foundations, unless they meet one of the exceptions under 509a. One major exception is the source of income.
Private foundations generally have a main source of income. Usually, this is funding received from a wealthy family or business, not multiple sources.
For most of their activities, foundations provide grants to public charities or individuals.
There are three types of foundations under the title of private foundation: private operating foundations, exempt operating foundations and private granting foundations (non-operating).
Each of these foundations has rules, tax exemptions and provisions that have operational differences.
The IRS is very specific about granting private foundation classes. Their letter of determination sets out the decision and operational expectations.
Running a private foundation requires strict adherence to IRS compliance issues. Violation of IRS compliance may result in dismissal of the corporation.
Note: A future column will deal with the particular differences in private foundation courses.