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The two most common types of nonprofit organizations started by individuals are public charities and private foundations.
Public charities generally are organizations that:
– By their very nature conduct inherently public activities,
– Have broad public financial support, or
– Actively function in a supporting relationship to other charitable organizations that have broad public financial support.
Private foundations are established for charitable purposes and to provide donors with a tax deduction for their contributions.
– These entities receive most of their financial support from a small number of contributors,
– Are normally controlled by their founders or substantial donors , and
– Normally must make charitable distributions each year.
Private foundations can be subdivided into two categories: “non-operating foundations” and “operating foundations.”
Non-operating foundations must distribute annually an amount equal to 5% of their net investment assets in the form of qualifying distributions, which include grants to qualified charities as well as necessary and reasonable administrative costs.
Operating foundations are subject to the same rules as non-operating foundations, except that they make qualifying distributions by sponsoring and managing their own charitable projects, rather than by making grants to other organizations.