The Difference Between Nonprofit Organizations and Foundations

The Difference Between Nonprofit Organizations and Foundations

05 Feb The Difference Between Nonprofit Organizations and Foundations

Posted at 01:01h in Nonprofit, Best Practices by
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If you’re not privy to the nonprofit world, you may hear Foundations and Nonprofit and think they are synonymous. In actuality there are a number of differences between the two and as professionals in both nonprofit and foundation staffing, we are here to answer all of your questions and describe the primary differences between the two of these associations.

What is a nonprofit organization?

According to Foundation List, a nonprofit is meant to describe a nonprofit organization not operating primarily to make a profit. Instead, it an organization whose mission focuses on furthering a social cause or a shared goal or mission. A nonprofit organization is one where the excess money it makes fuels the organization’s mission. Employees of a nonprofit still get a salary and regular income (excluding the volunteers), but they don’t benefit from run-over profits if the organization turns out to be successful. The money goes toward what that organization set out to do.

Nonprofit organizations receive money in the form of donations from the government like government grants, private donors, and other institutions in order to fund their mission and other expenditures. Nonprofits are tax-exempt organizations and can serve settings including research, religion, and education. Some examples of nonprofit organizations include the Boy Scouts of America, the Better Business Bureau, and the American Civil Liberties Union.

Are charities different from a foundation?

Another form of nonprofits are charities. Charities and foundations are not the same, but they are both considered to be a nonprofit entity and have tax-exempt status. While both are considered to be nonprofits in the eyes of the Internal Revenue Service, charities are not considered to be private foundations.

What is a nonprofit foundation and how is it different from an organization?

A foundation is an organization that did not qualify as a public charity. They are very similar to nonprofits, except money for a foundation usually comes from a family or a corporate entity, whereas nonprofit money often comes from their revenues and other donors. Some examples of foundations are the Kellogg Foundation and the Ford Foundation.

Difference between charitable organizations and private foundations

The term ‘charitable organization’ is used by the IRS to refer to any organization that meets some basic requirements. It is a legal term meaning that the organization has been granted tax exemption under Section 501(c)(3) of the Tax Code. There are two kinds of exempt entities: private foundations and public charities. Private foundations must meet additional criteria to become eligible for this tax exemption. Public charities are allowed to operate without meeting these additional requirements.

A public charity is a charitable organization that can be defined as such if it is supported by the public people and serves a public benefit, exists to support a separate charity, or exists to measure public safety features. They can range from hospitals and other medical research organizations, universities and other educational organizations, and churches or other religious organizations. All donations made to these are completely tax-deductible.

Other examples of these types of organizations can include social clubs, sports clubs, and homeless shelters. They do have to adhere to very strict rules when it comes to their federal tax exemption.

Operating and Nonoperating Foundations

It’s technically possible to donate money to private foundations, but many foundations won’t accept it from private individuals. As an alternative, they’ll take the money they started out with, invest it, and then distribute the money made from those investments. Foundations will also donate these funds to other nonprofits in the form of gifts or grants. Moreover, there are two types of foundations:

– A private nonoperating foundation grants money toother charitable organizations. These foundations often do not directly perform any charitable programs or services other than grant-making.

– A private operating foundation distributes funds to its own programs that exist for charitable purposes.

These foundations need to pass certain tests from the IRS over a period of time to determine whether or not they can retain their tax status. These tests include tests for income, support, assets, and endowment.

-Income test: Foundations cannot operate without satisfying the income test. It requires that the foundation spends at least 85% of its adjusted net income or its minimum investment return directly for the active conduct of its charitable activities.

-Support test: Foundations can meet the support test if one of these three things occur. If at least 85% of its support other than gross investment income is normally received from the general public and five or more unrelated exempt organizations, not more than 25% of its support other than gross investment income is normally received from any one exempt organization, and no more than 50% of its support is normally received from gross investment income, the foundation will pass this test.

-Assets test: Foundations can pass the assets test if 65% or more of its assets are devoted directly to the actively conducting public programming, a related business, or a combination of the two; consists of stock of a corporation that is controlled by the foundation and at least 85% of the assets of which are so devoted; or any combination of those two requirements.

-Endowment test: In order to pass the endowment test, the foundation must make qualifying distributions of at least two-thirds of its minimum investment return directly in actively conducting programs that benefit the public. If a foundation passes the income test, they will normally pass the endowment test.

 

Commonly Asked Questions About Nonprofits and Foundations

Understanding the differences between nonprofits, public charities, and private foundations can be confusing, especially when it comes to funding sources, tax implications, and governance. Whether you’re a donor, a nonprofit professional, or someone looking to start a charitable organization, it’s essential to know how these entities function and what sets them apart.

To help clarify these distinctions, we’ve compiled a list of frequently asked questions covering key topics such as legal requirements, tax benefits, reporting obligations, and operational differences. Below, you’ll find detailed answers, important facts, and trusted resources to guide you through the complex landscape of nonprofit organizations and foundations.

Let’s dive into the most commonly searched questions and provide the insights you need to navigate the nonprofit sector with confidence!

 

How do public charities differ from private foundations?

Key Facts:

  • Public charities rely on donations from individuals, corporations, and government sources, while private foundations are typically funded by an individual, family, or corporation.
  • Private foundations are required to distribute at least 5% of their assets annually to maintain their tax-exempt status.
  • Public charities often have more flexibility in their operations, including fundraising activities.

Where to Learn More:

What are the tax implications for donors to nonprofits versus foundations?

Key Facts:

  • Donations to public charities are usually tax-deductible up to 60% of an individual’s adjusted gross income (AGI) for cash contributions, while for private foundations, the deduction is capped at 30% of AGI.
  • Private foundations are subject to a 1.39% excise tax on net investment income.

Where to Learn More:

Can a nonprofit be both a public charity and a foundation?

Key Facts:

  • While a nonprofit cannot simultaneously be a public charity and a private foundation, a nonprofit can change its classification depending on funding and governance structure.
  • Some organizations set up a supporting organization, which allows them to function similarly to both a foundation and a public charity.

Where to Learn More:

What are the legal requirements to establish a nonprofit versus a foundation?

Key Facts:

  • To form a nonprofit organization, one must:
    1. Incorporate at the state level.
    2. Apply for 501(c)(3) status with the IRS.
    3. File annual reports and maintain compliance.
  • Private foundations must meet additional compliance regulations, including reporting all grantmaking activities.

Where to Learn More:

How do operating foundations differ from non-operating foundations?

Key Facts:

  • Operating foundations use most of their resources to run their own programs (e.g., Gates Foundation funds research and disease eradication efforts).
  • Non-operating foundations grant money to other nonprofits (e.g., Ford Foundation provides grants to educational institutions and social justice causes).

Where to Learn More:

What is the public support test for nonprofits?

Key Facts:

  • To qualify as a public charity, a nonprofit must receive at least one-third of its funding from public sources (e.g., individuals, businesses, or government).
  • If a nonprofit fails the test for multiple years, it automatically converts into a private foundation.

Where to Learn More:

Are there differences in governance between nonprofits and foundations?

Key Facts:

  • Public charities must have a diverse board of directors to meet public support requirements.
  • Private foundations can be controlled by a single family or entity, leading to more centralized decision-making.

Where to Learn More:

How do funding sources impact the classification of a nonprofit organization?

Key Facts:

  • A public charity receives the majority of its income from small donors, grants, or government funding.
  • A private foundation is usually funded by a single donor, corporation, or family.

Where to Learn More:

What are the reporting requirements for nonprofits compared to foundations?

Key Facts:

  • Public charities file Form 990 with the IRS annually.
  • Private foundations file Form 990-PF, which includes detailed information about grants, investments, and expenditures.
  • Foundations must also report their 5% minimum distribution requirement annually.

Where to Learn More:

Can a private foundation become a public charity?

Key Facts:

  • A foundation can convert to a public charity by meeting public support requirements for at least four years.
  • The transition involves legal, financial, and structural changes, requiring IRS approval.

Where to Learn More:

 

Where to Learn More About the Differences Between Nonprofit Organizations and Foundations

If you’re looking to deepen your understanding of the distinctions between nonprofit organizations and foundations, numerous resources are available, including online courses, nonprofit associations, dedicated websites, and industry conferences. Below is a curated list of educational opportunities and organizations that provide expert insights, networking opportunities, and in-depth learning on this subject.

Online Courses & Learning Platforms

1. Candid Learning

Candid offers free and paid courses on nonprofit management, fundraising, and foundation operations. Their resources are excellent for those looking to understand the structure and financial requirements of nonprofits and foundations.
📌 Website: https://learning.candid.org

2. Coursera – Nonprofit Management Specializations

Coursera provides courses from universities like Duke University, University of Pennsylvania, and Stanford on nonprofit governance, fundraising, and financial management.
📌 Website: https://www.coursera.org/browse/business/nonprofit-management

3. Harvard Business School Online – Nonprofit Leadership Courses

Harvard Business School Online provides executive education programs for nonprofit professionals, covering topics such as nonprofit finance and impact measurement.
📌 Website: https://online.hbs.edu/courses/nonprofit-management/

4. National Council of Nonprofits – Educational Webinars

The National Council of Nonprofits frequently hosts free webinars and training sessions on governance, fundraising, and compliance issues.
📌 Website: https://www.councilofnonprofits.org/tools-resources

5. NonprofitReady.org – Free Nonprofit Courses

This platform offers free online training on topics such as nonprofit law, grant writing, and financial management.
📌 Website: https://www.nonprofitready.org

Nonprofit & Foundation Organizations

1. National Council of Nonprofits

A leading organization providing guidance, research, and advocacy for nonprofit organizations and foundations.
📌 Website: https://www.councilofnonprofits.org

2. Candid (formerly Foundation Center & GuideStar)

Candid provides detailed grantmaker data, nonprofit research, and funding insights for those interested in the distinctions between nonprofits and foundations.
📌 Website: https://candid.org

3. Independent Sector

A national organization dedicated to advancing the nonprofit and philanthropic sector through research, policy advocacy, and leadership programs.
📌 Website: https://independentsector.org

4. Association of Fundraising Professionals (AFP)

AFP provides training and resources for fundraising professionals working in both nonprofits and foundations.
📌 Website: https://afpglobal.org

5. The Chronicle of Philanthropy

A nonprofit news source covering trends, policy changes, and fundraising strategies in the nonprofit and foundation world.
📌 Website: https://www.philanthropy.com

Nonprofit & Philanthropy Conferences

1. The Council on Foundations Annual Conference

This conference is geared toward foundation leaders and grantmakers, covering key trends in philanthropy, financial management, and nonprofit partnerships.
📌 Website: https://cof.org/conference

2. The Nonprofit Technology Conference (NTC)

For those interested in how technology impacts nonprofit organizations and foundations, this event provides training on digital fundraising, AI in philanthropy, and operational efficiency.
📌 Website: https://www.nten.org/ntc

3. AFP ICON (Association of Fundraising Professionals Conference)

The world’s largest conference for fundraising professionals, focusing on fundraising strategy, donor relations, and foundation grantmaking.
📌 Website: https://afpicon.com

4. Social Capital Markets (SOCAP) Conference

For those interested in the intersection of nonprofits, social entrepreneurship, and philanthropy, SOCAP is a leading conference for mission-driven businesses and foundations.
📌 Website: https://socapglobal.com

5. The BoardSource Leadership Forum

A conference dedicated to nonprofit governance, board leadership, and foundation oversight.
📌 Website: https://boardsource.org

Top Websites for Research & News

1. IRS – Tax-Exempt Organizations

For official IRS guidelines on nonprofit status, foundations, tax filings, and regulations.
📌 Website: https://www.irs.gov/charities-non-profits

2. Candid – Foundation Directory Online

The go-to resource for researching grant opportunities, foundation information, and funding trends.
📌 Website: https://fconline.foundationcenter.org

3. Philanthropy News Digest

Daily nonprofit sector news, policy updates, and grantmaking trends.
📌 Website: https://philanthropynewsdigest.org

4. GrantSpace – Learning Tools for Grant Seekers

A collection of free guides, webinars, and tools for nonprofit professionals and foundations.
📌 Website: https://grantspace.org

5. The Bridgespan Group

Research and resources on nonprofit strategy, funding models, and leadership.
📌 Website: https://www.bridgespan.org

6. Foundation List – Nonprofit Job & Resource Site

Foundation List is a leading job board and nonprofit resource hub, connecting professionals with nonprofit and foundation career opportunities while providing educational content on grantmaking, nonprofit leadership, and industry trends. It is particularly useful for nonprofit job seekers and foundation professionals looking to expand their networks and knowledge.
📌 Website: https://www.foundationlist.org

Final Thoughts

Whether you’re a nonprofit leader, grantmaker, or simply someone interested in the world of philanthropy, these resources provide valuable insights, training, and networking opportunities. By leveraging these courses, organizations, and conferences, you can stay informed about the evolving landscape of nonprofit organizations and foundations while gaining practical knowledge to enhance your impact in the sector.

 

Scion Nonprofit Staffing can help you with your nonprofit staffing and recruiting needs.

 

As you can see, there are many differences between a foundation and nonprofit, but they both are integral to serve the greater needs of communities. To learn more about working with foundations and nonprofits, contact the nonprofit recruitment experts at Scion Nonprofit.

We have industry experts who are well-versed in both staffing and recruiting for a wide variety of nonprofit positions for organizations all over the continental United States. Scion Nonprofit Staffing specializes in placing experienced, mission-driven nonprofit staff members from the entry-level to the executive level. Our search firm was specifically designed to meet the need of the nonprofit sector and effectively provides our devoted clients with top-notch nonprofit talent pipelines and human resource services. Contact us today to get started!

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