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The Merriam-Webster definition of a charity as “an institution engaged in relief of the poor” is somewhat outdated.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.

Types of charitable organizations

Definition: charitable organization

A charity is an organization which operates in order to benefit the general public. What is ‘beneficial’ is always open to debate, and therefore you can find charities both for and against the same cause. Nevertheless, both organizations count as charities because of their aim, which is what distinguishes a charity from other organizations. A charity has a distinct aim to provide a benefit to society and is funded by frequent contributions from its community.

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?

What is the difference between a non-profit and a charitable organization?

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.

What is the difference between a foundation and a charity?

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.
Note

The legal structure of a charity is not influenced by how it gathers its funds. A charity can be a trust, an unincorporated charitable organization, and incorporated charitable organization or a charitable company limited by a guarantee.

What are the responsibilities of a charity?

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.

What are the benefits of a charitable organization?

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.


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