Setting up a charity and implementing an effective structure can be challenging even for the best informed among us.
The type of structure you choose will directly affect how your charity operates, so it’s important to take time to consider all the possible options and which one is likely to work the best for you.
It may even be that a charity structure is not for you, so take time to consider whether there is already a charity doing what you are planning to do that you can work in conjunction with or perhaps your organisation would be better suited as a Community Interest Company or other type of social enterprise.
If you are set on establishing a charity, you’ll have to ensure you’re eligible. Namely, your organisation must have a clear public benefit, and objectives that fit within one of the charitable purposes as set out in the Charities Act i.e. the prevention and relief of poverty. You’ll also face a choice between the four main charity structures. These include:
These options may appear similar on the surface, but they have crucial differences, each of which can impact your charity in a variety of ways. It affects who will run your charity and oversee operations, whether it will have a wider membership, whether it is able to enter into contracts or directly employ staff and even whether your trustees may be personally liable for what your charity does.
Before we delve into the four principal structures, it’s important to clarify what we mean by ‘wider membership’. Put simply, some charities have a broader membership base and they must invite members to vote on important decisions. Other charities do not need or want this platform and, instead, the trustees are directly responsible for the running operations and making key decisions.
There are two models of this, which vary depending on whether or not you want to include a wider membership. The first is association CIO. This model is ideal if you want to be a corporate body and have a wider membership base. This is the most democratic way of structuring your charity as it requires input from each of your wider members. In this sense, it is your best option if you want to operate as transparently and inclusively as possible – but this can sometimes come with its own drawbacks; it can take longer to reach key decisions as the entire membership will need to be consulted (for example, on the appointment of new trustees).
The other option in this category to consider is a foundation CIO. This has the same broad requirements as an association CIO but differs in one key way: the only members are trustees. This means that you can make decisions much more easily and with the input from your fellow trustees only. In this sense, it’s less democratic but more efficient.
CIOs offer the same limited liability protection as charitable companies and they
can employ people and enter into contracts or purchase assets in their own name, similar to a charitable company. They are only required to register with the Charities Commission, which means that there is no need to file with Companies House.
Crucially, CIOs do not exist until registered by the Charities Commission. This is important as it can be a long process, so they are not as quick to form as a charitable company. Smaller CIOs can also have the benefit of preparing simpler receipts and payments accounts. A final consideration is that since the Charities Commission does not maintain a register of charges over CIOs, property lenders are often reluctant to grant CIOs secured debt – which is a problem if this is something you envisage needing in the future.
Charitable company (limited by guarantee)
This charity structure can be set up with or without wider membership and is governed by articles of association. Unlike with a CIO, you’ll need to register with Companies House, but are only required to do so with the Charities Commission if your total income is over £5000.
This form of charitable structure does offer you increased protection for your trustees and for any accrued debts, as you can ensure that they are only personally liable for a specified nominal amount – unlike with a traditional charitable trust, which offers no such safeguards. First, registration with Companies House is a relatively quick process – so these can be set up quickly. Charitable companies do not have the option of filing simpler receipts and payments accounts, so there may be additional costs involved to ensure compliance.
This is a particularly appropriate way of structuring your charity if you have limited assets and don’t want the hassle of establishing a corporate structure – which means you have the benefit of the set-up process being easier and it can be more flexible.
As with a charitable company, you’ll still need to be registered with the Charities Commission if your income is over £5000 but, unlike this, there is no limited liability protection for trustees. There is also the issue that trustees of an unincorporated association must hold assets on behalf of the charity, rather than resources being centralised or kept as a separate legal entity. In this sense, there is no legal differentiation between the association and its individual trustees – which could turn off potential funders. Like CIOs, smaller unincorporated charities do have the option of filing simpler accounts. As do Charitable Trusts, which we’ll explore below.
Setting up your charity as a charitable trust is a good option if you don’t need a corporate structure or a wider membership, which means there is (in theory) less red tape impeding progress. However, it does mean that you’ll be required to sign a trust deed, as will every individual trustee – making them liable for a specified sum of money, land or other assets. As with an unincorporated association, they’ll also need to keep hold of charitable assets.
Each form of charity structure holds its own distinct advantages and disadvantages, depending on whether you prioritise ease of management, member involvement or liability protection. It’s important to make sure you understand the implications of each so that you can carefully consider your options.
If you’re looking to set up a charity and are weighing up your options, take the time to speak to a specialist advisor who can clearly outline any potential problems or pitfalls you might face.
Speak to our dedicated charities team today to ensure that your not-for-profit thrives with good governance and compliance.