You hear the term “501(c)3” used to identify “nonprofits” but did you know that there are 3 distinct types of 501(c)3 nonprofit organizations that the IRS recognizes in the Internal Revenue Code?
The different types of 501(c)3 offer you great options in how you’d like to make your impact, so it’s important to understand the characteristics of each before filing.
So, here’s the breakdown…
3 Types of 501(c)3 Nonprofit Organizations
1. Public Charity:
This is the most common form out of all the different types of 501(c)3 nonprofit organizations that exists. This is what most people associate with the term “nonprofit.” Churches, libraries, museums, hospitals and private schools can qualify as public charity nonprofits.
Others include service-oriented nonprofits that rely on fundraising for more than one-third of their operating budgets. The United Way, Special Olympics and the American Society for the Prevention of Cruelty to Animals are all examples of service-oriented public charities.
A public charity is different from a private foundation in that the former is typically financially supported by a broad base of entities such as foundations, individuals, and government units. In fact public charities are not legally permitted to receive more than one-third of their incoming capital from commercial investments or activities that are unrelated to their primary purpose.
Moreover, while public charity nonprofits can accept donations that are tax-deductible, they are subject to intense scrutiny to determine whether they’re obtaining most of their income through donations and fundraisers as they ought to.
Public charities are eligible to receive tax-deductible donations from individuals (up to 50% of the donor’s income) and corporations (up to 10% of the organization’s revenue), and are governed by a board of directors. Another rule that public charities are subject to is that no more than 50% of their board of directors must be related to each other.
2. Private Foundation:
A private foundation is another type of 501(c)3 nonprofit organization. As the name suggests, “private foundations” receive financial support from “private” parties, as opposed to charities, which can receive donations from a wide range of entities, both public and private. As a result, private foundations receive revenue through a smaller donor audience, usually consisting of a family, community group, or through a business.
Given their narrow base of donors, a private foundation has to find other means of gathering a larger pool of monetary resources. Typically they do this by investing in endowment funds which help generate income. They use this income to give grants that further the charitable work of other organizations. A private foundation does not have active programs and can either be non-operating or corporate.
Donations to 501(c)3 private foundations are still tax-deductible for individuals (up to 30% of the donor’s income). Examples of 501(c)3 private foundations include the Bill and Melinda Gates Foundation and the Ford Foundation.
3. Private Operating Foundation:
Private operating foundations are similar to private foundations to a large extent but they also have active programs like those found in a public charity. For this reason, many consider these foundations to be a hybrid between public charities and private foundations.
A private operating foundation is found to be the least common of the three primary types of 501(c)(3) nonprofit organizations. It finances its own programs instead of sponsoring outside charitable activities. Popular private operating foundation endeavors include those that address the needs of low-income communities, support research for diseases and cures, and manage the operation of museums and libraries.
IRS regulations on private operating foundations are similar to those on private foundations and donations are still tax-deductible. Given that both private foundations and private operating foundations typically have donors with close ties to the charity, they are not scrutinized the way the other types of nonprofit organizations or foundations like say, public charities are. A few examples of a private operating foundation are the J. Paul Getty Trust and the Scoliosis Research and Education Foundation.
And there you have it! I hope you find these distinctions useful on your journey to bringing your mission to life and obtaining 501(c)3 tax-exempt status.
If you know the type of 501(c)3 nonprofit organization you’re launching and would like to obtain your tax-exempt status quick and hassle free, then click here for more details on our Instant Nonprofit Service.
To your mission,
Jacqui Long | Instant Nonprofit