How is a charity different from a foundation?

What type of nonprofit should you start?

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.