In ordinary discussions of different kinds of charitable organizations, the terms non-profit, not-for-profit, charity and foundation are often used interchangeably. However, each of these designations has legally distinct meanings and can differentiate between the legal status of these organizations. First, it is important to note that not all groups and associations that do “good work” are separate entities at all. Some are simply non-chartered groups of individuals who get together to do something without formal legal action. Even though they might have a separate name for their group, the entity does not have a separate legal existence from its members.
On the other hand, the terms “non-profit” or “not-for-profit” refer to organizations that have been chartered at the state level. Typically, this means that they have filed some sort of formation document with the Secretary of State’s office, and this organization has a separate legal existence from its members. Just because an organization has registered as a non-profit or not-for-profit organization with the state, however, does not mean that it has obtained tax-exempt status, either from the state taxing agency or from the Internal Revenue Service.
There are 27 different subsections of Internal Revenue Code Section 501(c) and three additional sections of the Internal Revenue Code under which a non-profit can be classified as “exempt” from income tax. A “charity” is this type of organization that is exempt from federal income tax under the Internal Revenue Code. Charities must be a formed organization whose organizational documents must meet certain requirements under IRC Section 501(c)(3). These can include organizations that are for purposes that are religious, charitable, scientific, testing for public safety, literary or educational, to foster amateur sport competition, or for the prevention of cruelty to animals or children.
A “public charity” is one subsection of these charities that is classified further under a different provision of the Internal Revenue Code based on its activities or under one of the various public support tests. These organizations typically get a large portion of their support from the general public.
A “private foundation” is another subsection of a charity, but one that does not meet the requirements for a public charity. A private foundation operates under a restrictive set of guidelines. Private foundations normally receive substantially all of their contributions from a relatively few sources and often rely on investment earnings as their source of ongoing support.
Whether you are considering starting a non-profit organization, or whether you do business with non-profits, it is important to know that there are differences in the types of charitable organizations, and what those differences mean.
Author: Laura A. Scott (bio)
Phone: 812.452.3557
email: lscott@bamberger.com
Tags: charitable organizations, Laura A. Scott, legal status, state charter, tax-exempt