What is a Public Charity?
We often hear the terms, “Non-profit organizations,” “charities,” “private charities,” “foundations,” etc. Understandably, these terms can create confusion: What’s the difference between a charity and a foundation? Private vs. public? How is the IRS involved?
This post will focus on what makes a public charity a public charity.
A public charity is an organization that has public support and is established to pursue a charitable or public mission, to support other charitable organizations or which tests for public safety.
Generally, organizations that are classified as public charities:
- Include churches, hospitals, colleges and universities.
- Have active fundraising programs and receive contributions from multiple sources, including the general public, governmental agencies, corporations, private foundations or other public charities, or,
- Actively function in a supporting relationship to one or more existing public charities.
A. 501(c)(3) Status.
Public charities are typically 501(c)(3) organizations. 501(c)(3) organizations are charitable organizations that are exempted from paying taxes by the IRS. 501 (c)(3) status exempts the public charity from federal, state and property taxes.
To be tax-exempt under section 501(c)(3) of the Internal Revenue Code, the public charity:
- Must be organized and operated exclusively for charitable, educational, religious, scientific, literary and other such exempt purposes allowed by section 501( c)(3) of the Internal Revenue Code.
- Cannot be formed or operated to benefit an individuals, company or other private interests.
- May not attempt to influence legislation as a major part of its activities.
- Cannot participate in any campaign activity for or against political candidates.
B. Applying as a Public Charity
501(c )(3) tax exempt status is obtained from the Internal Revenue Service via a tax exempt application. In applying for tax exempt status, the charity must:
- Organize as a corporation, a trust or an association.
- State its Exempt Purpose. The charity should state its intended exempt purpose (i.e., scientific, religious, literary, etc.)
- Participate in direct charitable activities (DCA). The charity must make a direct impact and explain to the Internal Revenue Service how it serves the public good.
A main differentiating factor between a public charity and a private foundation is where and how they get their funding. Unlike private foundations, public charities receive most if not all of their funding from the general public through donations and fund raising. In fact, to qualify as a public charity, it must be supported by the general public, which means that at least 33% of its revenue must come from small donor, the public, other public charities and/or from the government.
Public charities use these publicly-collected funds to directly support their mission and programs.
Next week, we will explore the benefits of starting a private foundation and what defines it as such.