Are you looking to start a charitable organisation but not sure where to begin? First things first, you need to choose the right not-for-profit legal structure. This will set clear guidelines on who runs the charity. Also, how the charity is run, and what the charity can do, for instance, whether it can employ people or own property.
Choosing the right structure at the outset will not only save you money but time down the line if you decide to change. You want to have this sorted out from the start so you can concentrate on the hard work.
In this blog, we talk about the four most common not-for-profit corporate structures and their advantages and disadvantages.
Charitable Company Limited by Guarantee “CLG”
A CLG has to be limited by guarantee rather than shares. There are no shareholders in a CLG, hence no dividend payouts. When you register, you should select “private company limited by guarantee” on the form.
A CLG is registered at Companies House and has a higher level of transparency. Since the Companies House register can disclose mortgages and charges, the chance of banks lending to a CLG over a charity is much higher.
However, there are some disadvantages, out of which dual registration is the biggest. Namely, a CLG is regulated and reports to both Companies House and the Charity Commission (when they make a profit of £5,000).
In a CLG, trustees have limited or no liability for a charitable company’s debts or liabilities. The members of the governing body of a CLG consist of individuals that are both charity trustees and company directors,. This causes an overlap of duties between company and charity law.
Charitable Incorporated Organisation “CIO”
A CIO is a charity that is regulated solely by the Charity Commission. As such, their purpose is entirely charitable. This means that they don’t pay tax on income. They also benefit from tax breaks along with the ability to claim Gift Aid on donations.
CIOs are more widely recognised as entirely charitable. Unlike charitable organisations incorporated at Companies House such as a CLG or a CIC (Community Interest Company). As such they are more open to funding opportunities.
A CIO can be set up only with a minimum of three trustees who will benefit from the corporate limited liability of the CIO.
Some of the disadvantages of setting up a CIO as a not-for-profit legal structure is the lending issues with banks or funders. They may be reluctant to lend to a CIO, especially if the organisation is new.
In addition, all CIOs have to submit accounts and annual returns to the Charity Commission regardless of income.
But the main disadvantage of a CIO is the low threshold for requiring an independent audit. This means that external audits are likely to be more costly.
Community Interest Company “CIC”
Unlike a CIO, which is a relatively new structure (established in 2013), a CIC was introduced in 2005 and is now well established. If you want to register a not-for-profit legal structure and have the flexibility to deliver something entrepreneurial that society will also benefit from, you should register a Community Interest Company or a CIC.
Setting up a CIC requires only one director, unlike the CIO, which needs a minimum of three trustees. A CIC is registered with Companies House, and unlike a charity, where you have to wait for permission to start operating, you can start straight away with a CIC.
The disadvantage of running a CIC means you won’t be able to get as many grants and funding as with charities. Since it’s not a charity, a CIC doesn’t get any special tax reliefs.
Charity
The Charity Commission regulates charities. However, if the organisation is a CLG, it is regulated by both the Charity Commission and Companies House.
As a charity, you will be exempt from tax. Donor’s can also take advantage of reducing their inheritance tax liability if they gift the charity money in their Will. Also, charities are more likely to raise funds and grants than non-charitable organisations, like a CIC, for instance.
A charity must have exclusively charitable purposes for the public benefit as defined under the Charities Act. Before registering with the Charity Commission, you must appoint a board of trustees and adopt a constitution.
As far as disadvantages go, the biggest is that the trustees of the charity are personally liable for any debts of the organisation.
Final thoughts
Setting up the right not-for-profit legal structure for your organisation may be tricky. You need to get familiar with all the duties and compliance requirements before you register. Ensuring you have chosen the right structure from the outset will save you lots of time and money.
If you’re interested in hearing all about the differences between charities and CICs have a listen to this podcast where we chat wtih with Emma Willder of Beyond Profit on this very subject.
If you are still not sure which not-for-profit legal structure to choose, it’s best to get legal advice early on, so you can move forward with confidence.