While many people mean 501c3s when they say “nonprofits”, there are actually 27 different types of legally recognized nonprofits. In addition to the public charities you are familiar with, 501c3s also include your churches, synagogues, mosques and temples, schools and universities, etc.
Another type of nonprofit classification is 501c6, or business leagues, Chambers of Commerce, real estate boards, etc. The NFL used to be a nonprofit under the 501c6 model until 2015 and the MLB was a tax-exempt non-profit under the 501c6 model until 2007. These leagues were classified as trade organizations, receiving tax exemptions until it became more of a PR nightmare than a money saving tactic. There’s 501c19 status which identifies organizations that work with former or current members of the military. There’s 501c13s for cemetery companies. The list goes on and on.
Under the 501c3 model, there are also many several types of organizations, including private foundations, private operating foundations and public charities. There are family funds, private trusts, community action funds, donor advised funds and fiscal sponsorships. We break them each down below.
Public charities are the nonprofit organizations you are most familiar with. Habitat for Humanity, the American Red Cross, your favorite athlete’s foundation, your community’s local homeless shelter, churches, private schools, etc. are all public charities. There are several requirements to file as a public charity. First, the organization cannot support a private interest and must support a public interest. The board of directors for the foundation must have more than 50% of its members that are unrelated, and none are allowed to make any profit from the organization. Another restriction is the 33% of revenue raised for the organization must come from diverse individual donors, other public charities or the government (ie. one organization cannot entirely fund a nonprofit organization). This helps to eliminate a corporate or personal influence over the work that the nonprofit is doing.
Public charities submit their legal and financial paperwork to the IRS each year and it is publicly available to anyone interested in the information. The benefits of a public charity include higher limits on donor tax deductible giving and the ability to get support from other public charities as well as private foundations, in addition to corporations and individuals.
A private foundation (ie. Bill and Melinda Gates Foundation, hospitals and universities) includes all 501c3s that register, unless they explicitly tell the IRS that they are not a private foundation (by applying the principles of a public charity above). Typically, individuals or small groups that want control over the work that they do in the community will form a private foundation. There is a minimum requirement of 5% of asset distributions to the foundation. Private foundations don’t allow for tax-exemption or tax deductions for donations to public charities, and require that a complicated 990-PF form be filled out each year. But the control that they give those involved is usually a benefit that outweighs the disadvantages. Organizations that primarily give to public charities also find that a private foundation is a better way to be set up organizationally.
Donor Advised Funds and Community Foundations
Community Foundations are classified as public charities by the IRS. They require a board of directors and diversified involvement. Community foundations typically focus on efforts in a specific location, ie. a major city. They offer a variety of programs that make an impact in a specific community. Money can be given to organizations through endowments, giving circles, scholarships, field of interest funds and donor advised funds. If you plan to make an impact in multiple communities, it may be better to skip the community foundation route, as they place a priority on causes in their region, but they are a great resource for those looking for local community impact.
Donor advised funds are also independent of community foundations, and offer a unique way to give back. Donors can give money to the organization and while the community foundation has legal control over the money, the donor typically has a say in where the funds are allocated. Your contribution can grow within the fund, tax-free. Not all donor advised funds are the same. There are different minimum donations to participate, minimums for grants and contributions, different fees, etc. It’s important to do your research to find the right donor advised fund for your needs.
Fiscal sponsorships are another unique way to give back. A fiscal sponsorship organization is a registered organization that typically handles the majority of the administrative and back office functions for an organization that they would need for their work as a public charity. The fiscal sponsor retains control of the contributions to meet IRS requirements, but they work in partnership with the organization to find the right beneficiaries.
Organizations that are not tax-exempt themselves can partner with a fiscal sponsor to collect tax-exempt donations from supporters. Fiscal sponsorships are a great way to give back without the legal and reporting headaches of establishing a public charity. Organizations may find that they can meet their needs while using a fiscal sponsorship to handle the back office and administrative requirements. The Players Philanthropy Fund, founded by retired NFL Kicker, Matt Stover, is a great example of a thriving fiscal sponsorship organization that serves many professional athletes.