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Published: 2008-03-26

Types of Charitable Organizations



General Information

Section 501(c)(3) of the Internal Revenue Code is one of the sections that is commonly referred to. An organization that has qualified under this section will have the following two principal tax benefits, namely:

  1. Earnings will be free of income tax; and

  2. Contributions will qualify for tax deductions.

It is important to distinguish between the charitable organization under 501(c)(3) and other organizations such as cooperative associations, labor unions, social clubs, chambers of commerce, and others which are exempt from income taxes but (with a few exceptions) do not allow a deduction for contributions to the entity (but may allow a deduction as a business expense).

It is important also to remember that the only way to be sure that a charitable organization is properly classified under 501(c)(3) is to examine its exempt status letter from the Internal Revenue Service. The words used in the name or title of the organization do not determine its status.

Each of the classifications has its own set of qualification requirements that must be met. They are very detailed and different for each organization and must be followed precisely in order to qualify. Even after the initial classification, however, a charitable organization under one category can always apply and move to another category as long as it meets the required tests of the code section.

It should be noted that despite the category in which the organization qualifies, the private inurement doctrine will apply to all of these organizations strictly prohibiting unauthorized private gain or benefit to disqualified persons. Reasonable salaries for services rendered necessary to the charitable organization and reimbursement of expenses paid on behalf of the charitable organization will be allowed. All charitable organizations should avoid unauthorized private gains to all disqualified persons by the payment of any income, distribution of goods, or providing of service as the Internal Revenue Services is diligent with disqualifying said items and in many cases will impose penalties on organizations and/or individuals involved when the rules are violated.

The Five Kinds of Section 501(c)(3) Organizations

Under Section501(c)(3) of the code there are five different kinds of organizations that can qualify as a charitable organization.

The five kinds of 501(c)(3) charities are:

  1. The private independent foundation.

  2. The publicly supported entity.

  3. The charity supported by gifts, dues and fees.

  4. The private operating foundation.

  5. The supporting charitable organization.

The Private Independent Foundation

A private foundation is a charitable entity formed as a corporation or as a trust by an individual, a family, or a business where it is anticipated that most, if not all of the funding will come principally from one source, that is, one individual, one family, one business. No solicitation of funds from the general public is planned. Most independent private foundations do not conduct directly their own charitable programs, but give to other charitable organizations for this purpose.

In completing the application of an organization (Form1023) under Section501(c)(3) to be classified as a charitable organization, the Internal Revenue Service begins on the assumption that all organizations will be classified as private independent foundations unless they meet the qualification requirements of one of the other sections.

The private independent foundation has the most restrictive rules of all of the charities. Its income is subject to a two (2%) percent excise tax each year, it is required to distribute five (5%) percent of its investment assets each year for charitable purposes, cannot hold private closely-held corporation stock beyond a limited period of time, cannot engage in any political activities, and has strict rules relating to conflict of interest transactions between the private foundation and any disqualified persons.

In addition, the rules relating to deductions on income tax returns for donors are more restrictive if the donation is made to a private foundation than to one of the other four categories.

For more information see the report on the private foundation.

The Public Supported Charity

This category contains and refers to the largest group of public charities under code Section501(c)(3). The category includes churches and schools and community foundations, and also contains a wide variety of other charitable organizations of various sizes.

The tax exempt letter received from the Internal Revenue Service will generally refer to this category under Section501(c)(3) as specifically authorized under subsection509(a)(1) of the code. This is a charity where it is anticipated that principal funding will come from the general public, governmental sources or other agencies or other charitable organizations rather than funding coming principally from one individual, one family, or one business. Solicitation of funds from the general public is usually planned for in this type of an organization. By and large this type of organization conducts its own charitable programs directly, but often joins with other nonprofit agencies to reach charitable goals.

This classification of a publicly supported organization must meet one of two tests to qualify initially and to stayed qualified:

1. At least one-third of its total support must come from donations from the public, that is, individuals, charitable entities, corporations, or government and membership dues - - - or

2. Public support from individuals, organizations, or government must equal at least ten (10%) percent of total support and it must show by facts and circumstances that it operates like a public charity with respect to the persons on the board of directors and to the extent services are available to the general public.

It should be noted that contributions from individuals, trusts, or corporations that exceed two (2%) percent of total support will not count in meeting the thirty three and one-third (33-1/3%) percent or the ten (10%) percent requirement of public support. As with all categories the rules are very detailed and can be complex and must be carefully reviewed and followed.

For more information see the report on the publicly supported charity.

The Charity with Support from Donations and Dues, Fees or Payment for Services

This charity under Section501(c)(3) will be referred to in the qualification letter as a subsection509(a)(2) organization.

In general two tests must be met to qualify under this subsection, namely:

  1. The public support test where the charity must receive more than one-third (1/3) of its support from any combination of gifts, dues, membership fees, and receipts from admissions, sales of merchandise, or performance of services - - - and

  2. The organization must show that its investment income and any unrelated business income does not exceed more than one-third (1/3) of total support.


The rules are very technical and complex and must be followed precisely. Under this classification we will find a wide variety of organizations that provide charitable services for a fee as well as some thatrealize a substantial amount of income from admissions, sales of merchandise, or performance of services.

The Supporting Charitable Organization

This classification of charitable organization will be referred to as qualifying under subsection 509(a)(3) of the code. A supporting organization has been sometimes compared to a barnacle that attaches itself and supports another public charity or charities and in effect acquires the public charity status of the organization it supports.

The tests and requirements are very complex, but in summary they are:

  1. A purpose test requiring the organization to benefit or carryout a purpose of the parent organization; and

  2. The control test requiring that the supported organization control the entity.

  3. The Private Operating Foundation

    This classification is a foundation but it is classified by the Internal Revenue Service as an operating foundation formed principally to operate or to conduct a specific charitable program. Unlike the private independent foundation which generally will grant its funds to other charitable organizations to conduct the charitable activity, the operating foundation conducts its own charitable programs either alone or sometimes in partnership with other entities. Foundations which operate a museum, theater or arts center, or any other charitable activity conducted directly by the foundation can be classified as an operating foundation.

    Report prepared by The Foundation Law Center

    Robert O. Doucette, Attorney at Law