Under state law a charity is organized either as a California nonprofit public benefit corporation, or as a charitable trust. In some states, a charity can be organized as a limited liability company with special provisions in its articles of organization.
For Federal and California income tax law, there are two basic types that can receive tax-deductible contributions: “Private Foundation” and “Public Charity”. Either type can be organized as a nonprofit public benefit corporation, or as a charitable trust, with some narrowly-defined exceptions.
- A Public Charity provides the maximum tax benefits for donors and allows more flexibility in its direct charitable operations; it is generally funded by numerous donors, or also by receipts from performing charitable operations (such as admission fees collected by the San Diego Zoo)
- A Private Foundation is usually controlled by one donor. It generally does not engage in direct charitable operations. Instead, it must make regular distributions for charitable purposes, particularly to Public Charities. It is subject to restrictions on its activities, particularly any transactions with the controlling donor and his or her family or business. A modest tax of 1% to 2% applies to its investment income. Moreover, donors receive less generous tax benefits.
“Foundation” is usually part of the name of a Private Foundation, but can also be in the name of a Public Charity; it simply connotes the setting-aside of charitable contributions for future use.
Hybrid types of charities include:
- A Supporting Organization, which is generally controlled by one or more Public Charities, and usually raises contributions for distribution to those Public Charities;
- A Private Operating Foundation, which does perform direct charitable activities, and accordingly is subject to fewer rules and restrictions than other Private Foundations.
- A Community Foundation is a Public Charity that gathers donations from numerous donors and distributes them to other Public Charities serving a particular region or cultural community. The San Diego Foundation is an example of a Community Foundation.