How is a charity different from a foundation?

Each type of 501(c)(3) is held to a specific set of guidelines to obtain and keep IRS nonprofit status, but it helps to make sure your group's goals are clear before you dive into paperwork.

The basic IRS nonprofit rules apply to both charities and foundations. The first paperwork you need to file is called incorporation paperwork, which outlines, among other things, how your organization will qualify as a charitable organization. You must clearly state your objectives and activities, from which point you're limited to your stated purpose. File all required IRS paperwork promptly, especially the annual Form 990. Check with your state for local laws, too. Late filing will result in fines; excessive neglect could get your 501(c)(3)'s status revoked.

By the time you file, decide what type of 501(c)(3) you'll become. Deciding factors include the relationship of the founding members. A public charity's board must be at least 50 percent unrelated by blood, marriage or business ties. A family- or business-run organization is therefore considered a foundation [source: McRay].

The organization's purpose is also relevant. Public charities actively run programs, such as homeless shelters or educational events. They must represent the public interest, which is why they're able to apply for federal funding and grants. Private foundations, on the other hand, generally support public charities or other foundations with grants, but there are exceptions, such as corporate-run foundations (which are a legal entity completely separate from, but wholly funded by, a parent for-profit company). Furthermore, foundations can be established as either a charitable trust (which disburses grants) or a nonprofit corporation (which is generally more active than a trust) [source: Foundation Center]. Though foundations might enjoy an air of mystery, with a tightly-held governance and slightly less oversight, they must still demonstrate that they're an exclusively charitable purpose.

By now, you might be wondering: Who pays for all of this? Read on to find out how public charities and private foundations are funded.

At this point, you should have ideas about funding. Public charities seek public support from government grants, individual donors, private foundations and other public charities. At least 33 percent of revenue must come from small donors that each give less than 2 percent of the organization's annual funding. Foundations rely on private donations from a small group, individual, family or corporation [source: McRay].

Public charities have a few advantages over private foundations. They might find it easier to attract support from financially savvy individuals, since individual financial contributors can write off donations up to 50 percent of their income. However, the tax deduction limit for individual donors to private foundations is 30 percent. The amount of the donation itself isn't limited in either case, just the portion that qualifies for tax deduction [source: Foundation Group]. Public charities have slightly easier tax filing if gross revenue doesn't exceed $25,000; public charities with higher revenues and private foundations must file the more complex Form 990-PF. Because of these benefits, public charities must prove their qualifications for the designation, or they'll be considered a private foundation by default.

Private foundations do have some advantages, however; for instance, they can be run by families or individuals related by business. There are also less strict funding restrictions, though they have to demonstrate they're actually using their resources; the IRS requires minimum asset distributions of 5 percent annually [source: McRay].

What if neither of these options suits your needs? Earlier, we mentioned a third type of 501(c)(3), the private operating foundation, which has an administration similar to a foundation, but operates its own active programs. The rules are especially strict, though. A private operating foundation must demonstrate that it qualifies for the benefits of public charities while adhering to the governance regulations of private foundations.

When you've got your board together and your documentation in order, it's time to do some good. Our Lots More Information section has links to other articles about charities, nonprofits, public service and volunteering to keep your motivation going.