While all charities are nonprofits, not all nonprofits are charities.
Here, you’ll find the primary differences between the two:
A nonprofit is based on the simple premise that none of the corporation’s net profit from donations, membership fees or business activities will benefit any individual.
There are many different types of nonprofit organizations. Many homeowner associations and clubs, for instance, are organized as mutual benefit nonprofit corporations because they serve their members’ collective interests but don’t benefit the general public. Those nonprofits that do benefit the general public are typically the best-known type of nonprofit. We call them charities.
A charity is an organization with philanthropic goals that aims to improve the quality of life for the community and beyond.
Charities come in two general types: public charities and private foundations. The key difference between public charities and private foundations is how each type of organization derives its funds. Private foundations are usually under the control of a select group of people and typically draw their funds from one significant source (a wealthy family, for instance, or a corporation). Public charities, on the other hand, typically rely on public support and derive their funding from many sources instead of one.
Below, you’ll find a few types of organizations usually defined as charities (though this list is not exhaustive):
- Churches or associations of churches
- Educational organizations
- Hospitals and medical research organizations
- Organizations that provide support for state colleges or universities
Charity taxes & donations
Many types of nonprofit organizations are eligible for various forms of federal tax-exempt status under Section 501(c) of the Internal Revenue Code, with public charities and private foundations defined as 501(c)(3) organizations.
What most clearly distinguishes 501(c)(3) charities from other nonprofits, however, is that donations to 501(c)(3) organizations are tax-deductible to their donors.
Come tax time, charities have the following filing options:
- Form 990, a Return of Organization Exempt from Income Tax form
- Form 990-EZ, Short Form Return of Organization Exempt from Income Tax form
- Form 990-N, the Electronic Notice (e-Postcard) for Tax-Exempt Organizations not Required to file form 990 or 990-EZ
- Form 990-F, the Return of Private Foundation
Which tax form the organization files depends on the type of charitable organization (public or private) plus the amount of their gross receipts and total assets. If a public charity’s gross receipts are less than or equal to $50,000, then it will file form 990-N. If a public charity’s gross receipts are between $50,000 and $200,000, and if its total assets are less than $500,000, the organization can file either form 990-EZ or form 990. If a public charity’s gross receipts are greater than or equal to $200,000, or if its assets equal or exceed half a million dollars, the organization must file form 990. All private foundations, regardless of income and assets, must file form 990-PF.
The bottom line
There are many kinds of nonprofits, and charities are only one type of nonprofit. Generally, if the nonprofit earns a substantial part of its income via public solicitation, it will be defined by the IRS as a public charity. However, most states require nonprofits to register as charities if they solicit donations of any kind from the public, and, as we have seen, private charitable foundations qualify as charities without necessarily soliciting donations at all.
So, what is the actual trick to determining if a nonprofit is a charity? The answer is reliably found in the organization’s purpose. If the nonprofit’s purpose is educational or religious, if it provides funds or services to help support medical research, or if it promotes a cause that in some way could benefit the general public, 99% of the time that entity is known as a charity.