How Does a Charity Work?

Charities in the U.S. exist to fill needs that government cannot address. More than 1.4 million charities hold 501(c)(3) designation from the Internal Revenue Service, according to the National Center for Charitable Statistics. This makes them eligible to accept tax-deductible donations and exempt paying federal taxes. A 501(c)(3) organization is either a public charity, private foundation or a private operating foundation. They operate differently, but must adhere to IRS regulations to keep their charitable status.

Although private foundations and private operating foundations provide financial support to educational, medical and cultural entities and activities, most people associate public charities with the 501(c)(3) designation. Foundations, including the Pittsburgh Foundation, Wal-Mart Foundation and Bill and Melinda Gates Foundation, operate on money raised through earnings on investments and dollars given by one individual, family or business. Public charities, such as the American Red Cross and United Way get their funding through donations from government agencies, a broad base of individual donors and foundations.

Public charities, like corporations, have a board of directors to keep them on track with their mission and to monitor their financial health. However, the directors on a nonprofit board do not get paid for attending meetings like their corporate counterparts. Small charities with few employees rely on the directors for help with marketing, human resources and accounting; directors for large charities sit on committees for specific functional areas such as compensation, programs and development or fundraising to finance the organization's operations. Regardless of the size of the charity, the board of directors appoints an executive director to handle day-to-day operations.

Trustees oversee foundations. They decide what grants the foundation will make, control its investment portfolio and, in small foundations, manage day-to-day affairs. Trustees of large foundations elect officers to fulfill management responsibilities. The board of trustees has to ensure that annual grants total the minimum distribution required by the foundation's articles of incorporation upon which the IRS based its nonprofit status. Grants must also fund charitable projects and activities in nonprofits such as community agencies, schools and hospitals to meet IRS qualified distribution requirements.

Charitable organizations operate under the IRS and public scrutiny. They cannot participate in political campaigns to maintain their tax-free status. When accepting donations, they must provide donors giving a $250 cash gift or property valued at least $75 a written receipt. Directors and trustees cannot benefit from the charity's activities, a situation known as conflict of interest. For example, a board member cannot use her association with the charity to sell products her company makes. Public charities must make their tax returns and application for exemption available to the public. Their record keeping must document all monetary distributions and non-financial activities.