Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
While you may think that “foundation” and “nonprofit” are the same thing, there are distinct differences between the two. They both serve the needs of millions of Americans, and people in other countries too. The goal of a nonprofit and a foundation are often laudable.How the two entities receive their funding differs, and how foundation vs. nonprofit operates too. There are tax differences. Read on to learn the differences between a nonprofit vs. foundation.
What Is a Nonprofit?
A nonprofit organization is dedicated to furthering a social cause or advocating for a shared point of view. It is a business/corporation that has been given tax-exempt status by the Internal Revenue Service (IRS) because it pursues a religious, scientific, charitable, educational, literary, public safety, or cruelty-prevention mission or area of work
How Nonprofits Work
Once you’ve registered your nonprofit, you must file IRS Form 1023, which is the formal request that the IRS recognize you as a 501(c)(3) organization eligible for tax exemptions under this rule.Nonprofit organizations receive their funds from governments, various institutions, and individuals. The surplus received is mainly funded in its operations. None of the members or employees are supposed to get the benefit from surplus. It’s called a nonprofit for this reason. Employees are not supposed to “profit.” In fact, many of the people who work for a nonprofit are volunteers.
Pros and Cons of Nonprofits
Nonprofits can be highly fulfilling. You are pursuing a mission you believe in. When your organization has nonprofit status, particularly when recognized at the federal level by the IRS, it can take advantage of tax and financial benefits:
When donations to an organization are tax-deductible, donors have an incentive to contribute.
Nonprofit organizations may be given favorable terms and discounts by landlords, service providers and retail companies.
IRS-recognized nonprofit 501(c)(3) public charities do not have to pay corporate income tax
However, fundraising is difficult and you may find yourself in fierce competition for donations. You will also come under pressure to be very open, even revealing financial statements to the media and general public. This type of accountability can result in unflattering press coverage, particularly if your organization is experiencing some financial or administrative challenges.
What Is a Foundation?
Foundations are a charitable organization, but they don’t qualify as public charities. Often funded by a person, married couple, family, or corporation, foundations enjoy tax-exempt status as long as they meet certain state and federal requirements.Foundations are similar to nonprofits, except money for a foundation usually comes from a family or a corporate entity. In fact, the foundations can donate money to a nonprofit from their revenues, often in the form of grants or gifts.
How Foundations Work
Foundations make grants to other charities and nonprofit organizations. They can take the money they started out with, invest it, and then distribute it.There are subsets of private foundations: operating and nonoperating. A private nonoperating foundation grants money to other charitable organizations and is the more common form. Foundations don’t directly perform charitable programs or services either. A private operating foundation distributes funds to its own programs that exist for charitable purposes.
Pros and Cons of Foundations
It’s easy to see why anyone would want to start a private foundation. Perhaps you want to support an important cause or establish a family legacy. Individuals who already donate large sums to charity also may wonder if they could make a bigger impact by starting their own foundation. A foundation allows you to strengthen and focus your philanthropic ideas.However, setting up a foundation requires a lot of work. You will usually need to hire outside professionals — such as attorneys, accountants, and others — who can provide expert advice on how to form and run your foundation.Private foundations must pay a 1% to 2% annual excise tax on their net income. The exact percentage depends on a foundation’s annual grantmaking. Your records will need to be meticulous.While different states may have different annual reporting requirements, the IRS mandates annual reporting by all private foundations. This process typically takes four to eight hours to complete and often requires an accountant or attorney to finalize and submit the necessary paperwork.
The Takeaway
A nonprofit differs from a foundation in key ways. How you receive money is not the same–and what you do with the money you receive. Foundations often award grants to nonprofits and charities. Like businesses, nonprofit organizations sometimes need cash to achieve their objectives and to expand. Many nonprofits qualify for grants, which is money you will not need to pay back.Cash can also come in the form of a loan. Loans are a tool that can help a nonprofit grow and succeed. Nonprofits may qualify for various small business loans, which are offered by banks, credit unions, and online lenders. You can compare small business loan rates through Lantern.
Frequently Asked Questions
What is the difference between a foundation and a nonprofit organization?
Is a foundation a nonprofit?
Can a nonprofit have 'Foundation' in its name?
Photo credit: iStock/SDI Productions
LCSB1122006
About the Author
Nancy Bilyeau
Nancy Bilyeau writes about student loans, mortgages, car insurance, medical debt and many other finance topics for Lantern. A veteran of the magazine business, she has edited stories on personal finance for Good Housekeeping and DuJour magazines and has written articles for The Wall Street Journal, Readers' Digest, Parade, Town & Country and Lifetime/A&E, among others. She is a graduate of the University of Michigan.
