What is a Public Charity?

Nonprofit organizations are big businesses. For example, the Humane Society earns more than $150 million annually in donations and other revenue. Likewise, the Red Cross is a behemoth, raking in more than $3 billion annually. Given those numbers, you may have wondered what it would take to start a public charity.

In this article, we will discuss the basics of public charities: Why you might donate or even start your organization, what it takes to set one up, and how these differ from other non-profit entities, such as private foundations and donor-advised funds.

A public charity is a tax-exempt entity with a public-regarding purpose. People typically use public charities for donations from a broad base of donors, clients, or customers and revenue from their services. Some charitable organizations, such as universities, churches, and research organizations, are automatically classified as public charities. Others need to qualify by satisfying IRS public support requirements (for example, by receiving a certain percentage of their operating funds from the public).

Why Would You Create a Public Charity?

Say there’s a cause you care about, and you’re committed to establishing an organization to help. Why would you specifically start a public charity instead of a private foundation or another charitable entity? There are a few reasons:

You are looking to raise funds from others versus relying on your wealth to support your charitable cause.
Public charities are often better equipped to handle large donations than private foundations because most of the largest charitable organizations are public charities.
Public charities offer tax deductions to donors, which can encourage more giving.
Public charities typically have lower administrative costs than private foundations.
Public charities can accept a wide range of donations, including cash, stocks, cryptocurrency, and real estate.

What Causes Can It Spend On?

Public charities can use their funds in several ways, including granting money to other nonprofit organizations, investing in charitable programs or initiatives, and providing scholarships or grants to individuals. Some of the most common causes are:

Charity and relief: This includes donations to homeless shelters, food banks, and other charities that help those in need.
Education: Donations to schools, universities, and other educational institutions.
Arts and culture: donations to museums, theaters, and other cultural organizations.
Environment: Donations to conservation causes and other environmental organizations.
Health: Donations to hospitals, clinics, and other health-related organizations.

Requirements For The Set Up

There are a few requirements for setting up a public charity.

First, you need to register the entity. State regulators require registration and forms for initial approval. The IRS involves Form 1023 (the application for tax-exempt status) and Form 990. A federal filing fee is also associated with setting up a public foundation.

Second, you’ll need to follow a few corporate formalities. These include a board of directors to oversee operations, bylaws, and a mission statement.

Third, you’ll need to keep up with ongoing filing requirements. First is the charity’s annual federal tax return, which you’ll file with the IRS. In addition, states typically require updates related to the charity’s distribution of funds.

How Are Public Charities And Private Foundations Different?

Public charities are different from private foundations in several ways:

First, they are open to donations from the public, while private foundations are only open to a limited number of donors.
They are typically better equipped to handle more significant donations than private foundations.
They are limited in how much of their financial support comes from investment income versus external funding sources. As a result, private foundations often rely upon investment income for their charitable distributions, while public charities rely upon fundraising.
Deductions for contributions to a private foundation are more limited than contributions to a public charity.
Private foundations have additional requirements and restrictions that do not apply to charities and can mean more overhead. For example, private foundations are subject to a 2-percent tax on net investment income that you can reduce to 1 percent if the private foundation makes enough qualifying charitable distributions; public charities are subject to no such additional tax or filing requirements.

How Are Public Charities And Donor Advised Funds Different?

Public charities and donor-advised funds are helpful for different purposes. Donor-advised funds are usually a good fit for people who want to give to charitable causes in a financially advantageous way. However, focus on outside fundraising instead of donating their funds.

Both are tax-exempt organizations but have significantly different overhead requirements. For example, public charities must file an annual tax return with the IRS and have a board of directors to oversee their operations, while donor-advised funds do not. Still, public charities can use their funds in broader ways than donor-advised funds.

Conclusion

Setting up a public charity can be an excellent way to rally your community to support causes you care about. They can significantly impact every part of society in today’s world, but that doesn’t mean they are the right fit for every charitable goal. Fundamental differences between these charities and other nonprofit organizations, such as private foundations and donor-advised funds, help determine when each makes sense.

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