Charities and foundations are two types of organizations that operate for charitable purposes. Charities are solely dedicated to charitable activities, while foundations provide funds to support other organizations. Nonprofit organizations, on the other hand, are more flexible in their activities and can work for charitable, civic improvement, wellness, recreation and pleasure purposes. In the United States, the designation of an organization as a charity or foundation determines its corporate structure.
For example, a joint-stock company holds shares, while a non-profit corporation does not. No special recognition is required to identify yourself as a non-profit organization; all you have to do is set up as that type of entity following the instructions of the particular state regulator (usually, the appropriate secretary of state's office).The Internal Revenue Service (IRS) considers public charities to be intrinsically accountable to the public, while private foundations have guaranteed funds and are less dependent on public approval. As such, the IRS imposes a series of regulations and restrictions on private foundations (PDF) to ensure compliance in their operations. Violations of these rules can result in additional taxes and penalties for the private foundation and its administration. Public charities have the advantage of having more flexible rules governing their operations and more generous tax deduction limits for donors.
For example, public charities can donate more freely to non-U. S. individuals or entities as long as they don't spend funds for non-charitable purposes. Private foundations must exercise responsibility for expenses or obtain a determination of equivalence before granting a grant to a non-United States country. It's important to note that just because an organization has “foundation” in its name doesn't necessarily make it a private foundation.
Most community foundations are in fact public charities. Many community foundations also act as sponsoring organizations for donor-advised funds (DAF). DAFs are also often established as the charitable subsidiary of large financial institutions. While DAFs qualify as public charities, they are subject to some of the same restrictions on their grants as private foundations due to their unique hybrid nature. Nonprofit organizations have a similar structure to foundations and charities; in fact, nonprofit organizations are charitable organizations, only that they have a specific goal or mission behind them.
Foundations can include both charities in the form of charitable trusts and nonprofit organizations, but foundations are created to support other organizations in monetary terms. Any organization with a charitable mission that is not driven by profits but by dedication to a certain cause is eligible for various forms of federal tax exemption under Section 501(c) of the Internal Revenue Code. The tax form that the organization submits depends on the type of charitable organization (public or private) plus the amount of its gross income and total assets. Think of nonprofit organizations as entities that work for a cause, such as reducing hunger in a community or protecting endangered species in a region. The privilege of tax-deductible charitable giving is limited to 501(c)(3) organizations and certain other very limited situations. A private foundation is a nonprofit charitable entity that is generally created by a single benefactor, usually a person or a company, that distributes grants to individuals or other charitable organizations in accordance with the foundation's charitable purpose.
With this initial donation, known as an endowment, an investment is made to generate income which is then distributed in the form of grants to individuals or other charities in accordance with the foundation's charitable purpose. Finally, if an organization enters into an overprofit transaction with a person who has substantial influence on the organization, a special tax may be imposed on both the person and the organization's managers who accept the transaction.