A 501(c)(3) organization is an entity exempt from federal income taxes under Section 501(c)(3) of the Internal Revenue Code (IRC). For an entity to qualify for the tax exemption, the entity must be organized and operated exclusively for an exempt purpose, which includes charitable, religious, educational, scientific, or literary purposes. 

Each 501(c)(3) organization falls into one of two categories: public charity or private foundation. A private foundation can either be a private nonoperating foundation or a private operating foundation. Nonoperating private foundations are more common than operating foundations. 

Public charities and private foundations differ primarily by the level of public involvement, public or private financial support, and the level of control the founders exert over the charity. 

Public charities are generally exempt from all federal income taxes, while private foundations are subject to an excise tax on net investment income. Public charities file an annual Form 990 (Return of Organization Exempt from Tax), while private foundations file Form 990-PF( Return of Private Foundation). 

Under the tax law, there is a presumption that a new 501(c)(3) organization is a private foundation unless it can demonstrate it qualifies as a public charity.

Attributes of a Public Charity
  • The majority of the financial support comes from donations from the general public. 
  • The charity is controlled by a board of directors who are all generally unrelated and independent of each other.
  • The charity engages in direct charitable activities by running its charitable programs. It hires employees, has volunteers, conducts seminars and conferences, and provides goods and services to further its charitable purpose.
Attributes of a Nonoperating Private Foundation
  • The majority of the financial support comes from one family or a closely held group. Many private foundations don’t accept any support from the general public.
  • The charity is controlled by a board of directors, mainly comprising family members or a small group of individuals.
  • The foundation does not engage directly in charitable activities. The foundation issues monetary grants and donates funds to other eligible 501(c)(3) organizations to support their direct charitable activities.  
Example of a Public Charity

In 2024, Adam Smith wants to form a nonprofit organization that provides food and clothing to the local homeless community. He will donate some of his money, but most of the support will come from the general public. Adam forms a nonstock corporation and files Form 1023 (Application for Section 501(c)(3) Election) for public charity tax-exempt status. 

Adam is one of 7 board members. The other six members are unrelated to Adam. In 2024, the charity received $400,000 in donations, of which $385,000 came from the general public. The charity spent $250,000 on direct charitable activities to buy food, clothing, medicines, and other support for the homeless community. The public charity must file Form 990.

Example of a Nonoperating Private Foundation

In 2023, John Smith wants to form a nonoperating private foundation. He will fund all of the foundation’s operations and will not solicit donations from the general public. John’s attorney forms a corporation and submits the Form 1023 application for 501(c)(3) exempt status. 

John adds himself, his wife, and two sons to the foundation’s board of directors. All board members intend to volunteer their time and will not receive direct or indirect compensation. In the first year, John donates $1,000,000 cash to the foundation. In 2023, the foundation disbursed $100,000 in grants to 6 different 501(c)(3) public charities. The foundation did not conduct any direct charitable activities, has no employees, and paid no compensation to the board members for their services. The private foundation must file Form 990-PF.

Visit our channel for a video tutorial on how to prepare a Form 990-PF for a nonoperating private foundation.

More Information on Charities

Taxpayers can find more information about charitable organizations on the IRS website. The IRS also maintains a database where you can search for tax-exempt entities and view their public filings.