Setting up your Organisation

The first charities were established over 400 years ago and becoming a charity is still the most widely recognised way for an organisation with a social mission to be established. It has very generous tax benefits associated with it and is recognised by all funders. Although charitable status is not suitable for all organisations it should always be one of the options considered by founders and social entrepreneurs.

Charity is a status, not a legal form. It can apply to any organisation which has exclusively charitable purposes under English law and exists to pursue public benefit. The only exception to this is a community interest company. A community interest company cannot also be a charity.

The Charities Act 2006 includes descriptions of the main purposes/objects which are charitable:

• the prevention or relief of poverty
• the advancement of education
• the advancement of religion
• the advancement of health or the saving of lives
• the advancement of citizenship or community development
• the advancement of the arts, culture, heritage or science
• the advancement of amateur sport
• the advancement of human rights, conflict resolution or reconciliation or the promotion of religious or racial harmony or equality and diversity
• the advancement of environmental protection or improvement
• the relief of those in need by reason of youth, age, ill-health, disability, financial hardship or other disadvantage
• the advancement of animal welfare
• the promotion of the efficiency of the armed forces of the Crown; or the efficiency of the police, fire and rescue services or ambulance services, and;
• any other purposes charitable in law

All organisations with charitable status must exist for the public benefit. The Charity Commission has published guidance on what this means and is conducting a review of charities currently registered to ensure they meet this requirement. It has been particularly controversial in relation to fee charging charities like private schools.

More information about charitable purposes and registering as a charity can be found on the Charity Commission website.

All activities carried out by charities must be in furtherance of their objects and must be for the public benefit. This does not mean that charities cannot trade.  Find out more about charities and trading.

Categories of charity

There are three categories of charity: registered charities (which are registered with the Charity Commission), exempt charities and excepted charities.

Until recently exempt charities were not allowed to register with the Charity Commission because it was thought they were adequately overseen by other public bodies, such as the Financial Services Authority or the Tenant Services Authority. Exempt charities have always been obliged to comply with charity law and following the Charities Act 2006, those that do not have a regulator that is able to regulate them as charities will be obliged to become registered charities.

Some organisations have been excepted from registering as charities. These include some religious charities, Boy Scout and Girl Guide charities and some armed forces charities.  Some of these organisations are now obliged to register as charities. 

Find out more information about excepted charities

Find out more information about exempt charities (CC23)

Charitable status has the following advantages:

Public recognition & trust

Charities are widely recognised as existing for social good. This can assist with fundraising.

A lock on assets

Organisations with charitable status are prevented from using their assets for any purpose other than to pursue their charitable objects. This means that the assets of a charity can never be used for other purposes or for private benefit.

Tax relief

Charities benefit from a variety of tax reliefs including:

• no corporation tax on profits made from trading in the course of delivering their charitable aims (primary purpose trading)
• 80% mandatory and 20% discretionary relief from business rates (rate relief)
• Gift aid on cash donations from individuals
• Stamp duty land tax relief on acquisitions of freehold property or entering into leases

Funding

Certain sources of grant funding are only open to organisations with charitable status.

The disadvantages of charitable status are:

Restrictions & requirements

Charities may face restrictions on the type of work that can be carried out or funded by them. For example, political activities and trading are both types of work which are subject to particular restrictions. Charitable status also means that the organisation must comply with administrative regulatory requirements including those relating to the preparation of annual accounts and returns.

The Charity Commission’s information on registration provides further information on the restrictions and requirements.

Unpaid board

Individuals on the board of a charity (often called trustees) must be unpaid unless the constitution of that charity or the Charity Commission permits payment. In general, payment of directors for particular services (e.g. the payment of a counsellor who happened to be a director to provide counselling services) is not a problem but the Charity Commission will want a detailed explanation before it will allow a charity to include in its constitution a provision allowing payment of trustees for being trustees.

This feature of charitable status can mean that it does not appeal to founders of organisations who need to receive a salary for the work they do but want to retain control. A founder who becomes a charity chief executive will receive a salary as an employee of the charity but can be dismissed by its board. A founder who sits on a board of charity is usually unpaid and, in any event shares control and responsibility equally with all the other members of the board.

For more information about payment of trustees see the Charity Commission’s publication CC11 Trustee Expenses and Payments.

No equity investment

Charities cannot raise equity investment. But it should be remembered that, for many organisations these ‘disadvantages’ are seen as advantages

This information was provided by NCVO.

A company limited by shares (CLS) divides its share capital into shares of fixed amounts and can then issue them to shareholders. The shareholders then become the owners of the company.

A CLS can be financed by grants, loans (secured and unsecured) and by equity.

EQUITY FINANCE

Dividends are paid from generated surpluses and are not therefore a cost of the business, unlike interest on a loan. Shareholders are only rewarded if there are profits available for distribution, and in the lean years they get nothing. Equity therefore has the advantage of being ‘patient’ finance.

Share capital has a positive impact on a company’s balance sheet, as it is classified as an asset. This is in marked contrast to a loan, which is treated as a liability. Consequently, a company that is financed by borrowings, for example from its parent charity (if a trading company) or from supporters, will find it very difficult to borrow money from a bank since the bank will regard it as already highly ‘geared’. On the other hand, if it has a reasonable amount of paid up share capital this should give it a stronger balance sheet, providing an asset based upon which a bank can take security.

Share ownership can bring a sense of involvement, and this has been used to good effect by companies that encourage share ownership among staff, or by social enterprises issuing shares to ‘social investors’. Shares are potentially transferable, thereby allowing an investor to realise his or her investment.

This information was provided by NCVO  http://www.ncvo-vol.org.uk/GetLegal

An Industrial and Provident Society (IPS) community benefit society (Bencom) is set up to benefit the community, whether that community are members or not. The legislation requires that a community benefit society must have some special reason for seeking registration as a society and not as a company. In practice this means including a standard constitutional provision requiring that benefits will not be returned to its own members, demonstrating that business will be conducted for the benefit of the community, and typically including an attachment to the co-operative principle of one member, one vote, regardless of contribution.

This information was provided by NCVO.

CICs are types of company. They may be limited by shares or by guarantee and they may be plcs. Certain companies are excluded from being community interest companies; these are ones which are political parties, are controlled by political parties or are engaged in political activities. The rules regarding what are political activities and the extent to which a CIC may engage in such activities are similar to the rules regarding charities and political activities. Charitable companies cannot also be CICs.

CICs operate in a broadly similar way to normal companies, except in certain aspects described below:

Just like ordinary company limited by shares (CLS’s) and company limited by guarantee (CLG’s), a CIC’s constitution is its Memorandum and Articles of Association. In addition, the CIC legislation requires that the Memorandum and Articles of Association of a CIC must contain certain protections. Model constitutions for different types of CICs can be found on the CIC Regulator’s website.

The principal feature of a CIC is that it contains a lock on its assets. This prevents profits being distributed to members or shareholders other than in certain circumstances. A CIC is obliged to pursue the community interest and must report on how it does this to the CIC Regulator.

A CIC is registered with Companies House in the same way as a normal company. However, there is one additional form to complete, which contains: a statement that the CIC is pursuing the community interest (including a description of the community and how its interest is pursued); and a declaration that the company is not an excluded company. Companies House will pass the application to the CIC Regulator who will assess whether the ‘community interest test’ has been passed. If it has, the CIC Regulator will return the application to Companies House, which will then incorporate the company. There is a small fee for registering a new CIC.

A normal CLS or CLG can be converted to a CIC. It would need to amend its constitution appropriately and then submit the required forms to Companies House.

CICs are regulated by the CIC Regulator and it is intended that the regulation should be ‘light touch’. However, the CIC Regulator is committed to responding to complaints from stakeholders and has considerable powers to act to protect the community interest. A CIC is required to file a community interest report each year. This report must include details of the remuneration of directors, dividends paid on shares and interest paid on certain types of loans. It must also explain how it has pursued the community interest and how it has involved stakeholders.

A CIC limited by shares or guarantee will be able to accept grants and take out secured and unsecured loans in the same way as a normal company. Interest rates on CIC borrowing must be at normal commercial rates, and performance-related interest is restricted. A CIC limited by shares will also be able to obtain equity finance. However, there are limits on the return that may be paid to investors. In the case of a loan where the interest payable is performance related, the interest cap is 10% of the average amount of the company’s debt in previous year.

There is a dual cap in respect of dividends:

• No dividend, as a percentage of the nominal value, of the share stated in the company’s articles, usually £1 can be higher than 20%.
• The profit distributed by the CIC must not be greater than 35% of its total profit. The profit distributed by the CIC must not be greater than 35% of its total profit.

If the shares are bought back by the CIC from the investor they can only be bought back at the nominal value of the share stated in the articles

This information was provided by NCVO.

You could also look at the Gov.uk website for further information on Community Interest Companies, which can be found here.

CIOs are incorporated organisations, with their own legal identity. A CIO can hold assets in its own name. The CIO has limited liability, meaning that trustees are not generally liable for the debts or liabilities of the charity.

The CIO is the only bespoke vehicle for charities. It has been designed with charities in mind, unlike the other legal forms which are adapted for charities. A CIO is created on registration with the Charity Commission.

A CIO is only formed once it has been registered with the Charity Commission (it cannot be established without Charity Commission involvement). This may involve a delay as it can sometimes take a long time to achieve registration with the Charity Commission, especially if the organisation’s objects or activities are unusual, although this is not always the case.

A CIO has a two tier governance system. Like a charitable company limited by guarantee it has both trustees and members.

Where the CIO has a wider body of members it is called an “association” CIO. An association CIO has a wider membership, including voting members other than the charity trustees. Therefore, a member does not have to be a trustee, someone who manages the charity.

OR

As with a charitable company limited by guarantee, the trustees and members can be the same people: if this is the case the CIO is called a “foundation” CIO.

Information provided by Bates Wells Get Legal.

An unincorporated association is a membership organisation. It can be whatever its members want it to be, and carry out whatever activity the members choose. It is the easiest, quickest and cheapest way for a group to set itself up. It is ideal for many small groups, especially those without staff or premises. A large number of groups fall into this category (sometimes without knowing it). To set up an unincorporated association, your group simply needs to draw up a constitution, setting out the rules under which it will be run.

Find out more about membership organisations

Find out more about constitutions

An unincorporated association can be a charity, but it does not have to be. Many unincorporated associations primarily benefit their own members, and are therefore not considered to be charitable and are not regulated by charity law. For an unincorporated organisation to be a charity it must have charitable aims and be run for the public benefit. If your group is not charitable you do not need to register with or report to anyone. If your group is charitable, you will need to register with the Charity Commission if your annual income is over £5,000 per year.

Find out if your organisation be charitable

Find out more about the Charity Commission

An unincorporated association is not incorporated, so it cannot enter into contracts or own property in its own right.

Find out more about incorporation

To set up an unincorporated association, all you need to do is write and agree a constitution in your group. If you do not plan to become a charity, your constitution should lay out whatever aims you want for your group. If you wish to be a charity, it is best to base your constitution on the model constitution on the Charity Commission website.

Find out more about the model constitution