When it comes to starting a nonprofit, many people are unsure of the difference between a charitable and a nonprofit organization. In this article, we will explore the key differences between these two types of organizations, and help entrepreneurs understand which one is right for them based on nonprofit organization types.
What Is a Charity?
A charity is an organization that serves a social or philanthropic purpose. This can include providing relief to the poor, aiding in the advancement of education or religion, or promoting environmental protection. Charities come in many forms, such as relief organizations, development agencies, religious groups, and hospitals.
The IRS identifies a charity by the following criteria:
– The organization must be organized and operated for tax-exempt purposes.
– The organization must not be a private foundation.
– The organization must have a governing body made up of directors, trustees, or members.
– The organization must not be an individual, partnership, or for-profit business.
-All funding must come from the public, not from private sources.
-All revenue must be used for tax-exempt purposes, not for private gain.
What Is A Nonprofit?
A nonprofit is an organization that is organized and operated for a public or mutual benefit other than generating profit for its shareholders or members. Nonprofits are often formed to advance a particular social cause or to promote the arts, education, or religion. They can take many different forms; such as community groups, business organizations, and membership clubs. It’s important to note the distinction between not for profit vs nonprofit organizations, as they both share the common goal of serving the public good but may have different legal and financial implications.
The IRS identifies a nonprofit by the following criteria:
– The organization may be organized and operated for tax-exempt purposes.
– The organization cannot be a private foundation.
– The organization must have a governing body made up of directors, trustees, or members.
– The organization cannot be an individual, partnership, or for-profit business.
What Are the Key Differences Between a Nonprofit and Charity?
Though charities and nonprofits may seem similar, there are a few key ways in which they differ:
Purpose
One of the main differences between charities and nonprofits is their purpose. A charity is typically formed to serve a social or philanthropic cause, whereas a nonprofit can be formed for any number of reasons beyond generating profit.
Tax-Exempt Status
Charity organizations and nonprofit organizations must apply for 501(c) tax-exempt status. Depending on the type of charitable or nonprofit organization, the subset, 501(c)3, status usually applies.
Activities
Charitable and nonprofit organizations are somewhat limited in tax-exemptions. Activities, services or the offering of products need to conform to the 501(c) requirements and further the mission or goals of the nonprofit or charitable organization.
Financial and Spending Requirements
Charity organizations and nonprofit organizations are required to use all of the monies received to further the purpose of the organization. Both organizations may use income received to cover salaries, overhead items and the costs of doing business.
Donation Receipts
Both charitable organizations and nonprofit organizations should provide donors with tax-deductible receipts for all donations, whether cash or goods.
Bottom Line
When it comes to starting a nonprofit organization, it’s important to understand the difference between a charitable organization and a nonprofit. Charities are typically formed to serve a social or philanthropic purpose, while nonprofits can be formed for any number of reasons. Both charitable and nonprofit organizations must file with the IRS for tax-exempt status. When deciding which type of organization is right for you, it’s important to consider your purpose and activities.