Different Types of Charities
Charities are one of around 25 types of organizations that are categorized as not-for-profit. A charity can be organized as a trust, corporation or an unincorporated association.
Public charities comprise churches, hospitals, schools and other philanthropically set up organizations. They raise funds for their operations through specific programs and from the general public. A public charity can also actively support other public charities.
Private foundations normally have a single main source of funds gifted by a single family or corporation. They provide grants to other charitable ventures that promote their mission. A private foundation can in turn be classified as a private operating foundation, an exempt operating foundation or grant making foundation. All charities are considered private foundations unless an organization is specifically excluded from this definition as referred to in section 509 (a) pertaining to a public charity.
Organizations qualifying as charities receive tax exemption under section 501 (c) (3) of the Internal Revenue Code if their organizing documents contain provisions to satisfy this requirement. These provisions ensure that the assets of a charity are used for the purpose described in section 501 (c) (3). If the charity is dissolved, the assets are distributed for an exempt purpose or to the federal or state government for public use. In addition to federal tax exemption charities get exempted from State and local taxes.
Private operating foundations are levied an excise tax on their net investment income if their total tax for the year exceeds $500. Additionally, penalty taxes can apply if the organization is run in a way that jeopardizes its main objective of serving the public.
An Exempt Operating Foundation is a private operating foundation that has been publicly supported for at least 10 years and has a governing body representing the general public. At any time during a tax year, fewer than 25% of this body would consist of persons considered “disqualified" on account of their majority stake in the organization. A private foundation requiring exemption should obtain a ruling from the IRS to this effect.
Private foundations that are neither of the above two are called grant making foundations.
All donations made to a tax exempt charitable organization by individuals or corporations are deductible under code 170.