What is a char­i­ta­ble or­ga­ni­za­tion? De­f­i­n­i­tion and types

The Merriam-Webster de­f­i­n­i­tion of a charity as “an in­sti­tu­tion engaged in relief of the poor” is somewhat outdated. These days, charities can support many causes, from providing financial aid to those in need to sup­port­ing and spreading awareness for animal rights or en­vi­ron­men­tal issues. In the US, the IRS defines a char­i­ta­ble or­ga­ni­za­tion in Pub­li­ca­tion 557 as one that “is organized and operated for purposes that are ben­e­fi­cial to the public interest.” The number of charities in the US is vast, but what exactly is the dif­fer­ence between a non-profit and a charity? What is the dif­fer­ence between a public and a private charity? And how does a char­i­ta­ble or­ga­ni­za­tion compare to a foun­da­tion? All these questions will be answered in the following.

Having es­tab­lished that a charity is an or­ga­ni­za­tion with al­tru­is­tic goals, you may wonder what types of charity there are. At this point, it is also worth dis­cussing the legal structure of a charity. A charity is a kind of non-profit or­ga­ni­za­tion. However, there are different types of non-profit or­ga­ni­za­tions covered in our dedicated article on non-profits. So what is the dif­fer­ence between a charity and other non-profits?

De­ter­min­ing whether your or­ga­ni­za­tion is a charity or another type of non-profit is important because there will be a dif­fer­ence in how the two types are taxed. The trick to knowing whether an or­ga­ni­za­tion is a true charity lies in the de­f­i­n­i­tion of a charity. What is the aim of the or­ga­ni­za­tion? If you can answer this question by stating an aim that serves the greater good – such as an ed­u­ca­tion­al or religious purpose, for example – then the or­ga­ni­za­tion counts as a char­i­ta­ble one. Of course, you must be able to provide proof for this, but you can read more on how to start a charity here.

Generally speaking, charities can be clas­si­fied into two main forms: public charities and private foun­da­tions. You will have heard of foun­da­tions and charities before and they share many sim­i­lar­i­ties. The key to their dis­tinc­tion lies in the way they gather funds for op­er­a­tional purposes. There’s also a dif­fer­ence in how the two operate. Private foun­da­tions tend to hand out grants to in­di­vid­u­als who meet some criteria set out by the foun­da­tion. Charities, on the other hand, are more likely to take action, such as providing cooked meals or en­ter­tain­ment for elderly people. This dis­tinc­tion is not a rule, however, but more of a general tendency. The de­fin­i­tive dif­fer­ence between a foun­da­tion and a charity lies in the way they gather funds.

Private foun­da­tions often collect their funds from a single key source, for example, a wealthy bene­fac­tor. This may be a wealthy family who believes in the cause or a cor­po­ra­tion that wants to give something back. As such, the funds of a private foun­da­tion are con­trolled because they are dependent on a main source of income.

Public charities don’t rely on a single source of income. Instead, they depend on public donations or gov­ern­men­tal grants. You may have noticed how some hospitals and churches are reg­is­tered as charities. These or­ga­ni­za­tions rely on income from several sources, which is what gives them their status as a “public” charity. One of the dis­tin­guish­ing features of public charities then is their de­pen­den­cy on frequent donations from the public.

The dif­fer­ences between a foun­da­tion and a char­i­ta­ble or­ga­ni­za­tion can be sum­ma­rized as follows:

• A foun­da­tion is usually created by a single entity and is funded by one main, private entity.
• A public charity depends on funds from the general public and the gov­ern­ment, and puts these funds into action to support its cause.
• Foun­da­tions and charities are more similar than different, but their dis­tinc­tive dif­fer­ence is how they are funded.

A charity will most likely have a board of directors who help run the ac­tiv­i­ties of a charity. This board will have a set of re­spon­si­bil­i­ties to ensure that the charity meets set ex­pec­ta­tions. For example, one of the re­quire­ments for a charity is to have a clear aim and if that aim is not being put into action or is not evident enough in how the charity manifests, then the board of directors has a re­spon­si­bil­i­ty to fulfill this duty. A charity should also keep its members and the general public informed of any changes to its outlook and goals. This ensures that members and the general public have a trans­par­ent re­la­tion­ship to the entity they are sup­port­ing fi­nan­cial­ly. If there is a change in or­ga­ni­za­tion or activity, or indeed a change to its aim, some people may either choose to support it more or support it less. This re­la­tion­ship to the general public is one of the re­spon­si­bil­i­ties of a charity. A charity must also function as a non-profit or­ga­ni­za­tion in order to be a real charity. This means that it has financial re­spon­si­bil­i­ties to give back to the community that funds it.

Certain benefits to opting for a charity as a legal structure are seen as con­tro­ver­sial in the business world – par­tic­u­lar­ly when it comes to tax relief. This is why charities are strictly monitored and it is important to take the re­spon­si­bil­i­ties of a charity seriously. There are several benefits to a charity as a business structure:

1. Tax Relief: Char­i­ta­ble or­ga­ni­za­tions may be eligible for tax reliefs of different kinds, meaning they have more dis­pos­able funds to put into projects to fulfill their goals. It may be worth con­sult­ing a tax advisor when applying for tax exemption with the IRS.
2. High Public Regard: Don’t listen to what other people think of you! The slogan may be true on a personal level, but in the business world it’s important to maintain a good re­la­tion­ship with the public and donors. By starting a charity, many people will recognize that you’re trying to do good in the world. In other words, charities are well-respected by those who support their cause.
3. Grant El­i­gi­bil­i­ty: Your business’ status as a non-profit charity will mean that you’re eligible to apply for funding grants. This is not to be un­der­es­ti­mat­ed because it will most likely be one of the main sources of funding for your charity.

Click here for important legal dis­claimers.