THE DIFFERENCE BETWEEN A NON-PROFIT AND A CHARITY
When discussing charitable organizations, the terms non-profit, not-for-profit,charityand foundationare often used interchangeably. However, each term has a legally distinct meaning signalling a different legal status for each of these organizations. It is important to recognize that not all groups and associations that do “good work” are separate legal entities. Some are simply non-chartered groups of individuals who get together to do something without creating a formal legal entity. Even though they might have a separate name for their group, the entity does not have a separate legal existence from its members.
On the other hand, the terms “non-profit” or “not-for-profit” refer to formal organizations that have been chartered at the state level. Typically, this means that they have filed a formation document with the Secretary of State’s office, and this organization has a separate legal existence from its members. Just because an organization has registered as a non-profit or not-for-profit organization with the state, however, does not mean that it has obtained tax-exempt status, either from the state taxing agency or from the Internal Revenue Service.
There are more than 30 types of tax exempt organizations under the Internal Revenue Code. A “charitable organization” is one type of non-profit organization that is exempt from federal income tax under the Internal Revenue Code. Charities must be a formed organization whose organizational documents meet certain requirements under IRC Section 501(c)(3). These can include organizations with purposes that are religious, charitable, scientific, for public safety, literary, educational, fostering national or international amateur sports competition, or for the prevention of cruelty to animals or children.
A “public charity” is one subsection of these charities that is classified further under a different provision of the Internal Revenue Code based on its activities or under one of the various public support tests. These organizations typically get a large portion of their support from the general public.
A “private foundation” is another subsection of a charity, but one that does not meet the requirements for a public charity. A private foundation operates under a restrictive set of guidelines. Private foundations normally receive substantially all of their contributions from a relatively few sources and often rely on investment earnings as their source of ongoing support.
Whether you are considering starting a non-profit organization, or whether you do business with non-profits, it is important to know that there are differences in the types of charitable organizations, and what those differences mean.