There are many different categories of nonprofit organizations. Generally, though, the IRS classifies them into two major buckets: public charity or private foundation. The difference between the two depends on whom the organization supports and how it receives funding.

Private foundations operate to support individuals and other 501c3 nonprofit organizations through grants and scholarships. Private foundations receive most of their annual revenue (greater than 67%) from a single source.

For example, a family may set up a private foundation to offer college scholarships. In this case, the family provides the organization with most (or all) annual funding for the organization’s entire existence.

Since Private Foundations do not rely on public donations, their Boards of Directors can include related people.

In most cases, all other nonprofits are public charities. Public charities are formed for public benefit, meaning their services and programming are available to the entire community. While public charities can focus on a specific charitable class, for example, elder care, their services are considered open to anyone who is part of that class.

As a public charity, the organization receives funding in several different ways. These include private donations, corporate sponsorships, grants, and gifts from private foundations. We’ll cover all the options a public charity has for funding later in this guide.

Churches are a form of public charity. While their donations might come mostly from member’s tithes, those are considered personal and public contributions. All other rules governing public charities, including unrelated board members, apply to churches.