Is a Charitable Foundation the Same as a Nonprofit Corporation?

Charitable foundations and certain nonprofit corporations that organize expressly for charitable purposes may apply to the Internal Revenue Service for recognition of tax-exempt status. The IRS definition of charitable organizations includes the public charity and the private foundation. A charitable foundation, as recognized by the IRS, is also a nonprofit corporation. The nonprofit corporation is a legal business structure organized at the state government level. However, only those organizations that meet IRS requirements are granted federal tax-exempt status.

Although state corporation laws differ, organizations usually register as corporations and apply for nonprofit status by filing organizing documents, such as articles of incorporation, and registering with the state tax agency. States may grant nonprofit corporations certain benefits, such as exemptions from income, property and sales taxes. Approved organizations adopt one or more approved charitable purposes, as determined by IRS regulations for tax-exempt organizations. A nonprofit corporation follows state laws governing charities, including governance by the nonprofit board of directors instead of shareholders. The incorporators -- individuals who sign and file the organizing document -- may not receive a distribution of profits as would occur in a for-profit corporation.

A nonprofit corporation may apply as a private, charitable foundation for tax-exempt status under Section 501(c)(3) of the IRS tax code by completing Form 1023, Application for Recognition of Exemption. Federal tax-exempt status affords nonprofits exemption from federal taxes and allows charitable deductions for donations to the organization. The application process requires a nonprofit corporation to identify whether it is a public charity or private foundation. Major differences include the organization’s primary activities and source of income.

Private foundations usually have one source of income, such as a family trust or corporate funds. A public charity conducts fundraising activities to generate income from the public, private foundations and other organizations. Some private foundations make grants to other organizations. The IRS recognizes three types of private foundations: private operating, exempt operating and grant-making. The designation determines, in part, whether the nonprofit corporation pays taxes on its investment income and the deduction allowed for charitable donations.

The IRS requires a private foundation to include special provisions from its tax code in its organizing documents. The provisions regulate management of the nonprofit corporation’s assets and the conduct of its board of directors. Special provisions prohibit the nonprofit corporation from amassing excessive holdings and require annual income distribution. One provision requires the nonprofit corporation to limit its tax liability through advantageous scheduling of its annual income distribution.