Table of Contents
Foundations, charities, and nonprofits all operate with a mission-driven focus, aiming to serve public or community interests rather than to generate profits. And while they are similar, there are distinct differences among the three as well.
Each structure has distinct legal, operational, and financial characteristics, in addition to important tax differences. Read on to learn what separates foundations, charities, and nonprofits from one another.
Key Points
• Foundations typically fund other organizations or projects through grants, whereas charities focus on directly providing aid and services to those in need. Nonprofits may include both foundations and charities.
• When it comes to funding, foundations rely on endowments or large donations, charities are usually funded by public donations and fundraising, and nonprofits typically generate revenue through membership fees, services, and grants.
• Nonprofits serve both public and private interests, foundations serve specific causes, and charities are more focused on social, health, or environmental fields.
• All foundations and charities are nonprofits, but not all nonprofits are charities.
Defining Each Entity
A foundation is a type of nonprofit organization that typically provides grants or funding to support specific causes, projects, or other nonprofits. It can be private or public and usually relies on endowments or donations for funding.
A charity is a type of nonprofit organization focused on providing aid, services, or relief to improve public welfare. Charities often address social issues like poverty, education, health, or disaster relief and are primarily funded by donations.
A nonprofit is an organization that operates for a specific mission or cause, rather than for profit. Profits are reinvested into the organization’s goals. Nonprofits can include charities, foundations, trade associations, and advocacy groups.
What Is a Foundation?
Foundations are charitable organizations, but they don’t qualify as public charities. Often funded by a person, married couple, family, or corporation, foundations enjoy tax-exempt status as long as they meet certain state and federal requirements about what a foundation is.
Foundations are similar to nonprofits, except that money for a foundation usually comes from a family or a corporate entity. In fact, foundations can donate money to nonprofits from their revenues, often in the form of grants or gifts.
Private Foundation vs. Public Charity
Comparing a private foundation vs. a public charity reveals important differences. Public charities and private foundations are both specific kinds of mission-driven nonprofit organizations. However, public charities seek to improve the public good in some direct way, and they actively fundraise and often receive funding from a variety of sources, especially the public and/or governmental organizations. Hospitals and research organizations affiliated with them, houses of worship, and schools may be public charities. While private foundations may support charitable work, they are not the same as public charities.
How Foundations Work
Foundations make grants to other charities and nonprofit organizations. They can take the money they started out with, invest it, and then distribute it.
There are subsets of private foundations: operating and nonoperating. A private nonoperating foundation grants money to other charitable organizations and is the more common form. These foundations don’t directly perform charitable programs or services, either. A private operating foundation distributes funds to its own programs that exist for charitable purposes.
What Is a Charity?
A charity is a type of nonprofit organization dedicated to improving public welfare with a focus on social issues. A charity’s primary goal is to benefit society or specific groups, not to generate profit.
Charities rely heavily on donations, grants, and volunteers to carry out their work. In many countries, charities are eligible for tax-exempt status, meaning they don’t pay taxes on the funds they raise. Charities operate under strict regulations to ensure transparency and that funds are used for their intended purposes.
Recommended: How Do NGOs Get Funding?
How Charities Work
Charities aim to make a positive, lasting impact on the communities or causes they serve. They work as nonprofit organizations, meaning any surplus income is reinvested into their programs and services.
Charities rely on volunteers, staff, and partnerships with other organizations to carry out activities such as providing aid, education, healthcare, or advocacy. They are accountable to donors, beneficiaries, and governing bodies, and they’re often required to report on how funds are used.
What Is a Nonprofit?
A nonprofit organization is dedicated to furthering a social cause or advocating for a shared point of view. It’s a business or corporation that has been given tax-exempt status by the Internal Revenue Service (IRS) because it pursues a religious, scientific, charitable, educational, literary, public safety, or cruelty-prevention mission or area of work.
How Nonprofits Work
Once you’ve registered your nonprofit, you must file IRS Form 1023. which is the formal request that the IRS recognize you as a 501(c)(3) organization eligible for tax exemptions under this rule.
Nonprofit organizations receive their funds from governments, various institutions and individuals, and nonprofit startup grants. Any surplus received is mainly funneled into its operations. None of the members or employees are supposed to get the benefit from a surplus. This is why it’s called a nonprofit: Employees are not supposed to “profit.” In fact, many of the people who work for nonprofits are volunteers.
Recommended: Funding Sources for Nonprofits
Pros and Cons of Each
Each category of organization has its own advantages and drawbacks. Here’s a closer look at each type.
Foundations
Foundations allow you to support an important cause or establish a family legacy. A foundation allows you to strengthen and focus your philanthropic ideas. Individuals who already donate large sums to charity may decide they could make a bigger impact by starting their own foundation.
However, setting up a foundation requires a lot of work. You will usually need to hire outside professionals — such as attorneys and accountants — who can provide expert advice on how to form and run your foundation.
Additionally, private foundations must pay a 1% to 2% annual excise tax on their net income. The exact percentage depends on the foundation’s annual grantmaking. Your records will need to be meticulous. While different states may have different annual reporting requirements, the IRS mandates annual reporting by all private foundations. This process typically takes eight hours to complete and often requires an accountant or attorney to finalize and submit the necessary paperwork.
Charities
Pros of charities are that many charities qualify for tax-exempt status, which enables them to direct more resources toward their programs. They can also rely on volunteers, which fosters community involvement. This creates a sense of purpose and social responsibility among donors and participants.
However, despite their good intentions, charities can face challenges in efficiency and accountability. Limited funding and reliance on donations can make it difficult to sustain long-term programs or scale operations. Administrative costs can reduce the amount of money directly benefiting the cause, leading to criticism about resource allocation. And finally, regulatory oversight and competition for donor funds can also make it harder for smaller charities to thrive.
Recommended: How to Start an NGO
Nonprofits
Nonprofits can be highly fulfilling – you’re pursuing a mission you believe in. When your organization has nonprofit status, particularly when it’s been recognized at the federal level by the IRS, it can take advantage of tax and financial benefits:
• When donations to an organization are tax-deductible, donors have an incentive to contribute.
• Nonprofit organizations may be given favorable terms and discounts by landlords, service providers, and retail companies.
• IRS-recognized nonprofit 501(c)(3) public charities do not have to pay corporate income tax.
However, as you’re looking into how to start a nonprofit, you’ll discover that it can be a labor-intensive process. What’s more, fundraising is often difficult, and you may find yourself in fierce competition for donations. You can also come under pressure to be very open, even to reveal your nonprofit financial statements to the media and general public. This type of accountability can result in unflattering press coverage, particularly if your organization is experiencing some financial or administrative challenges.
Recommended: How Much Does It Cost to Start a Nonprofit?
Structural and Operational Differences
Structural differences among foundations, charities, and nonprofits include foundations often focusing on grantmaking, charities providing direct aid, and nonprofits covering a range of missions.
Operationally, foundations primarily manage endowments, charities often rely on public donations and volunteers for hands-on work, and nonprofits may serve educational, advocacy, or membership-based roles beyond charitable activities.
Tax Implications and Regulations
Foundations, charities, and nonprofits all typically qualify for tax-exempt status under Section 501(c)(3) in the U.S., meaning they are exempt from federal income tax. However, each type of organization has different regulations.
Foundations must meet stricter guidelines, including mandatory annual distributions and they may be subject to excise taxes. Charities focus on public benefit and must prove their charitable activities to maintain their tax-exempt status. And finally, nonprofits can include a broader range of organizations, and some, like trade associations, may not be fully tax-exempt, depending on their purpose and activities.
In order to be tax-exempt, an organization must exist for one of the following reasons, according to the IRS:
• Religious
• Charitable
• Scientific
• Testing for public safety
• Literary
• Educational purposes
• Foster national or international amateur sports
• Prevention of cruelty for children or animals
Donations to both foundations and charities are usually tax-deductible, as well.
Funding and Donation Processes
Foundations are typically funded through large endowments or donations from wealthy individuals or corporations. They primarily distribute grants to other organizations or projects aligned with their mission.
Charities rely on donations from the public, grants, and fundraising events. Their funding is often more diverse and directly supports their programs, services, or aid initiatives.
Finally, nonprofits may receive funding through membership fees, services, sponsorships, and donations. Not all nonprofits focus on public fundraising; some rely on private funding or grants. Each type of organization allocates funds based on their specific mission.
Recommended: What Are Nonprofit Business Loans?
Choosing the Right Structure for Your Organization
The right structure — foundation vs. charity vs. nonprofit — depends on your organization’s mission and funding approach. If your goal is to provide grants or financial support to other causes, a foundation could be ideal. Charities, on the other hand, are suited for organizations that focus on direct services or aid to the public, relying on donations and public support. And finally, a nonprofit structure is typically broader and can support a variety of missions, including advocacy, education, or trade associations, with more diverse funding options.
Consider tax implications, regulations, and your long-term goals to help you choose the right structure to align with your organization’s purpose and operational needs.
The Takeaway
Foundations, charities, and nonprofits differ in many key ways. How each type of organization receives money is not the same – and what each does with the money it receives differs, as well.
Like businesses, nonprofit organizations sometimes need cash to achieve their objectives and to expand. Many nonprofits qualify for grants, which don’t need to be paid back.
Funding can also come in the form of a loan. Loans are a tool that can help a nonprofit grow and succeed. Nonprofits may qualify for small business loans, which are offered by banks, credit unions, and online lenders.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
What is the difference between a foundation and a nonprofit organization?
A nonprofit is a charitable organization with a specific social goal that uses its revenues and surplus to fund its operations rather than benefit the organization’s members, shareholders, or employees. A foundation refers to a charitable organization that sources funds from its founders, whether they’re members of a family or a corporate entity.
Is a foundation a nonprofit?
Yes, a foundation is a nonprofit corporation or a charitable trust that makes grants to organizations, institutions, or individuals for charitable purposes such as education, culture, science, or religion.
Can a nonprofit have “Foundation” in its name?
Yes, but it’s not recommended because it could create confusion and deter donors – since foundations usually can’t accept private donations. It’s even more important not to imply that your nonprofit is a government entity. That means refraining from using names that include words like “national” and “federal,” as they’re often used for government purposes.
Are all nonprofits considered charities?
No, not all nonprofits are considered charities. While charities are a type of nonprofit focused on public benefit, other nonprofits, such as trade associations or social clubs, may serve specific member interests rather than charitable causes. Nonprofits vary in purpose, but all reinvest profits into their mission rather than distributing them.
What are the main types of charitable organizations recognized by the IRS?
Organizations that exclusively serve charitable, educational, religious, literary, or scientific purposes or test for public safety are among those considered charitable organizations by the IRS.
Photo credit: iStock/SDI Productions
SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
SOSMB-Q226-079