Charitable Foundations: Considered Nonprofit Corporation or Not?

The Ford Foundation is an example of a private foundation.

 The Internal Revenue Service calls nonprofits “public charities”. The IRS does not use the terms “charitable foundations” although the public commonly uses this term. Whether you start a private foundation or found a nonprofit corporation, you must file with your state to create a legally separate company. Another option is to start a public foundation that you set up as a corporation or a trust.

Charitable Foundation

Charitable foundation is not a term the IRS uses nor is it a legal term. What a charitable foundation generally refers to is whether or not the organization makes grants to other organizations. For example, the United Way is a charitable foundation. Like the United Way, many grant making organizations do not use the term “foundation” in their names.

Private Foundation

The IRS recognizes private foundations as a separate classification from other nonprofits. In order for your organization to qualify as a private foundation, its primary business must be providing grants to nonprofits and individuals with specified needs. Individuals, families and corporations found private foundations to fund causes or missions they support. You would therefore found a private foundation if you had the funds to support all its activities including offering grants.

Public Charity/Public Foundation

“Public foundation” is not a term the IRS uses. Public foundations are grantmaking public charities that have multiple funding sources similar to other nonprofit corporations. If you want to create a foundation but do not have the personal funds to support a private foundation, you can found a nonprofit and dedicate it to funding other nonprofits. Because of this, who is or is not a foundation can be confusing. The good news is that if you file for tax exemption for your nonprofit or foundation and choose the wrong classification, the IRS will send you a letter explaining why your choice is incorrect and either request that you re-submit or assign you the correct classification.

Public Charity/Nonprofit Corporation

To qualify as a public charity, or nonprofit corporation, your nonprofit must meet several criteria. Your organization must provide services to its target groups or must support other nonprofits and actively pursue donations or grants from foundations, donors or government agencies. Your nonprofit can also generate revenue from its tax exempt activities. If your nonprofit is a church, hospital, shelter or other service provider, it has full tax exemption and all donations to it are fully tax deductible.

Form 990

Nonprofit corporations and foundations must file some version of Form 990, an information report, annually with the IRS. If you operate a nonprofit corporation or public foundation, you must file Form 990. If you operate a private foundation, you must file Form 990-PF. Unlike private for-profit corporations, the IRS considers these documents public. The IRS sends copies of all Fom 990s to Guidestar, an organization that aggregate nonprofit information. You may also opt to post it on your nonprofit or foundation’s website.


Resources (Further Reading)