You’ve got an idea for a not-for-profit, something you’ve been thinking about for a while. Or something has happened in your life or your local community and you want to give something back. Most charitable organisations start off that way. But, you’re not sure how to officially set up, there are so many different options and it’s difficult to know which one is right for you. You’re not alone! But choosing the right legal structure from the outset is important so that you can concentrate on the hard work.
So, we’re going to explain the most common structures. We will also explain some of the pros and cons between them.
First things first, do you want to be an unincorporated charity or an incorporated charity? Most charities start out unincorporated because of the informal setup procedures. They also usually only have a handful of members.
Unincorporated Structures
There are 2 main types of unincorporated structures you can choose for your charity:
- Unincorporated Charitable Association; and
- Charitable Trust
The difference between the two is that a Charitable Trust is governed by an official legal document. Whilst many charities use the word “trust” in their name and all charities hold their assets on trust, Charitable Trusts are formalised by way of a Trust Deed or a Declaration of Trust. Essentially, what this means is, if the Charitable Trust acts outside of the terms of the formal document, then the Court and the Charity Commission have the power to take enforcement action.
Advantages
- Easy to set up
- Flexibility
- Simplicity
- East to wind up
Disadvantages
- Trustees are personally liable for debts
- Difficult to enter into contracts because there’s no separate legal entity
- Difficult to hold property
- Difficult to pursue any legal action
- Being unregulated limits funding opportunities
Incorporated Structures
The following are the main categories for not-for-profit corporate structures:
Charity
The main advantage of being a charity over any other corporate structure is the tax exemptions. Also, charities can access much more external funding than other charitable organisations. To qualify for charitable status, the organisation’s purpose must be for the public benefit as defined under the Charities Act. Prior to registration with the Charity Commission, you must appoint a board of trustees and adopt a constitution. You will be solely regulated by the Charity Commission.
The biggest disadvantage is that the members/trustees of the Charity are personally liable for the debts of the organisation.
Charitable Incorporated Organisation “CIO”
This structure is relatively new and was introduced by the Charity Commission in 2013 to bridge the gap between organisations that choose to register with Companies House to provide the trustees with limited liability protection, except for breach of trust. Those that choose to register with the Charity Commission because their purpose is wholly charitable.
There is no need for dual registration if you register as a CIO and therefore you will only have one regulator to deal with – the Charity Commission. However, the reporting requirements are onerous when compared with Companies House.
CIOs also benefit from the tax breaks that Charities can take advantage of along with the ability to claim Gift Aid on donations. Benefits on rate relief also apply if your CIO has property. Being a CIO also opens the doors to lots more funding opportunities than, say, an unincorporated charitable organisation, Company Limited by Guarantee, or a Community Interest Company.
One of the main disadvantages is that the threshold for requiring an independent audit of the CIO’s accounts is much lower when compared to a Charity. So, the additional costs of this external audit should be considered.
Company Limited by Guarantee “CLG”
Similar to a CIC, a CLG is run like a limited company. However, the main difference is that there are no shareholders and therefore no dividend payouts.
There is no express duty to act in the best interests of the charity placed upon the members of a CLG.
CLGs are registered at Companies House so have a higher level of transparency. The Companies House register discloses mortgages/charges. Banks are therefore more confident lending to CLGs over charities because they can register the mortgage on a public register.
Some of the disadvantages are the dual registration requirements. Once a CLG makes £5,000 it should also register with the Charity Commission. Also, due to Companies House being designed for profit-making organisations there is an assumption that members have a financial interest in the company. Whereas this is not the case for charities. This leads to an unclear overlap of duties under both company law and charity law.
Community Interest Company “CIC”
CICs register with Companies House rather than the Charity Commission. You can set a CIC up with 1 director which can be a good option over a Charity, which requires a minimum of 3 trustees. CICs are run more akin to a limited company but with the purpose of benefitting the community in some way. This means that you can operate as a business and make a profit whilst also giving something back to the community in a charitable way.
There are fewer onerous regulatory requirements because a CIC is registered under Companies House rather than the Charity Commission. However, being a CIC will mean you are less likely to be considered for grants and funding opportunities that charities take advantage of.
Members of a CIC can be paid without worrying about there being a conflict of interest. However, there is a cap on the amount that a member can receive in dividends. There are also restrictions on what happens to the CICs assets.
You can register with Companies House as a CIC and, once registered, you can start operating straight away. Whereas registration with the Charity Commission is a much slower process because you are prohibited from working under the charity until you get the green light.
Final Thoughts
What’s clear is there are lots of different legal structures you can choose for your not-for-profit. However, choosing the right structure is really important. Also, understanding your duties and the compliance requirements placed upon you is vital. Getting the right advice early on will help you decide which structure is right for you so you can be confident moving forward.
Find out more about the difference between a CIC and a charity on our latest Charitea & Biscuits episode with Kate and Kirsty from K&K Legal Consulting.
