Foundation vs Charity vs Nonprofit: Key Differences Explained

If you want to do good in the world, you have several options like starting a foundation, charity, or nonprofit organization. But what exactly is the difference between these three entities? With overlapping missions focused on making an impact, it’s easy to get them confused.

In this article, we’ll break down the key distinctions when it comes to structure, funding sources, tax status, and activities for foundations, charities, and nonprofits. Understanding the nuances will help you decide which option is the best fit to fulfill your philanthropic vision.

Defining Foundations

A foundation is a type of charitable organization that provides funding to individuals, nonprofits, or other entities through grants and charitable donations. Foundations can be public or private:

• Private foundations receive funding from an individual, family, or corporation. Some well-known examples are the Bill & Melinda Gates Foundation and the Ford Foundation.

• Public foundations raise money from multiple public sources like donations and government agencies, Community foundations that support local causes are one form of a public foundation,

Once established, foundations generate income through investments and distribute the funds according to their mission. Unlike nonprofits and charities, foundations don’t directly run their own charitable programs and services. Their role is grantmaking to support the work of other organizations.

The Role of Charities

A charity is a nonprofit organization that benefits the public through activities like relief for the poor advancing education promoting health, protecting the environment, and more.

To be considered a charity and receive tax exemptions, an organization must focus its efforts on:

• Relief of poverty
• Advancement of education
• Advancement of religion
• Other purposes beneficial to the community

Charities carry out their own programs and operations to drive impact – they don’t just provide funding like a foundation. Many charities rely heavily on donations and volunteers to support their initiatives.

Well-known charities include the American Red Cross, Salvation Army, Goodwill, and United Way.

What are Nonprofit Organizations?

A nonprofit is an organization that uses surplus revenues to further its mission or social cause rather than distributing profits to owners or shareholders.

Nonprofits can take many forms like charities, educational institutions, trade associations, hospitals, advocacy groups, and more. To qualify as a nonprofit, the IRS requires that the organization serve some public good and provide a community benefit.

Some key features of nonprofits:

• They are mission-driven rather than profit-driven.

• Many nonprofits are run largely by volunteers.

• They are eligible for tax-exempt status at the state and federal levels.

• Nonprofits can receive tax-deductible charitable contributions.

• Surplus revenue must be retained and used to further the nonprofit’s purpose.

Nonprofits cover an incredibly broad spectrum of focus areas from arts, culture, and humanities to mutual insurance companies.

Comparing Tax Treatment

One major difference between foundations, charities, and nonprofits lies in their precise tax status:

Foundations

• Private foundations must pay an excise tax of 1-2% on investment income.
• Subject to stricter regulations on self-dealing investments.

Charities

• Most qualify as 501(c)(3) public charities with full federal tax exemption.
• Also exempt from state and local taxes.

Nonprofits

• 501(c)(3) nonprofits receive full federal tax exemption.
• Other nonprofits like social clubs may still qualify for some exemptions.

The 501(c)(3) status applies to most charities and many nonprofits, but not to private foundations. The trade-off is that private foundations have more control over grants and investments without as much public disclosure.

Where Funding Comes From

There are also key differences between foundations, charities, and nonprofits when it comes to funding sources:

Foundations

• Initially funded by major donor(s) – an individual, family, or company.
• Self-sustaining through investments and endowments.
• Award grants from investment income.

Charities

• Rely heavily on donations from the public.
• Apply for grants from foundations, corporations, and government sources.
• May generate revenue through program fees, thrift stores, or other activities.

Nonprofits

• Diverse sources like donations, government grants, corporate sponsorships, program revenues, membership dues, etc.
• Earned income strategies to fund operations.
• Many nonprofits hold fundraising campaigns.

As you can see, foundations distributions enable charities and nonprofits to advance their mission. And charitable donations from the public support the work of charities and nonprofits.

How Activities Differ

The permitted activities and operational structure also differentiate foundations, charities, and nonprofits:

Foundations

• Award grants to nonprofits and charities to carry out charitable work.
• Limited direct charitable activities.
• Overseen by board of trustees or directors.

Charities

• Run direct service and assistance programs in fields like health, education, or human services.
• Rely on volunteers, donations, and grants.
• Governed by elected board of directors.

Nonprofits

• Vary widely in focus from arts to environment to research and more.
• Directly carry out programs, services, and advocacy work.
• Represent member interests or benefit a cause.
• Governed by board elected by membership/shareholders.

So a foundation provides funding to enable charity and nonprofit initiatives. Charities take direct action to provide aid and services. And nonprofits conduct activities that serve member interests and the public good.

Should You Start a Foundation, Charity, or Nonprofit?

Determining whether to establish a foundation, charity, or nonprofit depends on your goals, funding capabilities, and desired involvement.

Ask yourself these key questions:

• Will you operate your own programs or do grantmaking for others?

• Do you have significant funding to start an endowment?

• Is receiving tax-deductible donations important?

• How involved do you want to be in day-to-day activities?

The answers will help guide you to the right model. A foundation may make sense if you want autonomy in grantmaking from your own endowment. Nonprofits allow direct involvement in charitable activities funded from diverse sources. And charities focus on maximizing donations to provide public services.

While foundations, charities, and nonprofits share altruistic aims, they have distinct structures, funding sources, and permitted activities. Understanding the core differences will empower you to pick the right approach to drive change and live out your philanthropic purpose.

Whether you want to award grants, mobilize volunteers, advocate a cause, or spearhead charitable programs, there is an option to build something meaningful. Seek expert legal and financial advice to bring your vision to reality. With passion and commitment, you can make a real difference in areas you care deeply about.