Understanding the world of nonprofits, and where foundations and other forms of giving fit in.
Nonprofit sector collectively describes the institutions and organizations in American society that are neither government nor business. A nonprofit is an organization that exists to benefit the public and isn’t in the business of making money. Any profits it earns aren’t distributed to shareholders, like a for-profit business does; rather, any profits are used to further the organization’s mission or charitable purpose.
Because nonprofit organizations offer programs and services that otherwise would have to be provided by the government, the government excuses them from the taxes that for-profit businesses must pay. A private foundation receives this special tax-exempt classification when created, and with this classification comes a responsibility to act on behalf of and uphold the public trust.
Nonprofits come in all shapes and sizes. Some are small, community-based organizations run by volunteers, and others are large, complex, professionally run businesses. Internationally, nonprofits are often referred to as NGOs (nongovernmental organizations).
To become a nonprofit, an organization must apply to the Internal Revenue Service (IRS). Once the organization receives nonprofit status from the IRS, it is exempt from paying income taxes. The IRS calls these types of organizations 501(c)(3)s—signifying their special “tax exempt” status. Within the nonprofit sector, there are a few different types of organizations.
Public charities are the organizations people usually think of when they hear the word charity. These organizations are typically supported by many funding sources and have missions that range from helping the poor to easing community problems to advancing religion, science, or education. Examples include hospitals, universities, churches and temples, museums, zoos, libraries, social services agencies, and public health clinics.
If you look in your hometown or city, you can find examples of public charities everywhere, such as Big Brothers; Big Sisters; National Public Radio; the Sierra Club; the American Red Cross; the Salvation Army; and small organizations working in the arts, education, health, environment—the list goes on and on!
Unlike public charities, private foundations are typically funded by one source (or just a few). Because there is less public support and input, private foundations must follow stricter rules. The law distinguishes between two major types of private foundations:
- Operating foundations—Organizations that primarily run programs (e.g., DC Public Library Foundation).
- Non-operating foundations—Organizations that primarily provide grants to other organizations or individuals (e.g., The Bill & Melinda Gates Foundation, The W.K. Kellogg Foundation).
What are some different types of foundations and giving?
- Independent or family foundations are formed with money given by individuals or families, and, if a family foundation, it is usually run (governed) by family members themselves.
- Company-sponsored or corporate foundations receive funds from their parent companies, although legally they are separate organizations.
- Community foundations seek support from a variety of donors, and they also give grants to organizations in the town, county, or region they are located. Community foundations are considered public charities, not private foundations. Community foundations offer individuals and families something called a donor-advised fund—allowing them to donate charitable dollars without having to set up their own private foundations.
- Giving circles are groups of people who pool their charitable donations and decide together where to allocate the money.
- Individual giving is just that—charitable giving done by individuals. This is by far the most common type of giving.
What are philanthropy support organizations?
There are many organizations out there that specifically work to strengthen the field of philanthropy. If you want to learn more about giving well, or meet other people involved in philanthropy, they are a good place to start. Here are some examples:
- Grantmaker support organizations—These national organizations focus on one or more specific types of grantmakers. Examples include Exponent Philanthropy, the Council on Foundations, The Philanthropy Roundtable, and the National Center for Family Philanthropy.
- Regional associations of grantmakers—Regional associations help support philanthropists in a specific geographic are like a state, region, or metro area. To find your local association, visit www.givingforum.org.
- Affinity groups—These groups support grantmakers that fund a certain area, cause, or population. Learn more at www.cof.org/organization-type/affinity-group.
Excerpted and adapted from Teen Philanthropy Cafe and The Foundation Guidebook.