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Is setting up a charity right for you?

| Duncan & Toplis | 14 July 2022

Setting up a charity to help those in need or further a cause is a noble goal – but the strict guidelines of how to structure a charity can prove challenging.

There are other alternatives that may better suit your needs, such as becoming a type of social enterprise or even a Community Interest Company (CIC).

CICs are a newer type of legal structure and are not registered with the Charities Commission. They are a good option for people wishing to trade with a social purpose or to carry on other activities for the benefit of the community.

Generally speaking, they do not have a profit motive, but it also means that they do not enjoy the same charitable status and exemptions as a charitable company.

They do, though, offer the same protections as charities in terms of asset locking and caps on distributions. They make their filings with Companies House and must pass ongoing community interest tests. They are particularly useful for holding local assets such as community halls and facilities, so this could be one to consider.

If you’re unsure of whether CICs or charities are right for you, exploring our blog on the four main charity structures and the benefits of each could offer you some clarity.

These briefly comprise of:

  • Charitable incorporated organisations (CIO)
  • Charitable companies (limited by guarantee)
  • Unincorporated associations
  • Trusts

Other steps and considerations when forming a charity

If you’ve weighed up your options and you think opting to set up a charity is best suited to your specific needs and remit, there are a number of stages you’d need to carefully consider, such as:

  • Finding trustees
  • Choosing a name for your charity
  • Deciding and writing your charitable purpose
  • Creating a governing document
  • Consider the level of scrutiny you wish to have for the accounts
  • Tax reliefs, exemptions and VAT
  • Registering for gift aid

In terms of the governing document, model articles for charities are available from the Charities Commission (or Companies House for CICs) for the various different structures which can be adopted in their entirety or used as a good starting point and amended as appropriate.

Assets and Trustees

Depending on the level of income and or assets a charity holds, there are different levels of scrutiny required. Very small charities require no external scrutiny whilst
others require independent examinations or even a full statutory audit. If you’re starting a charity, you may insist on a full statutory audit upon formation for full assurance to stakeholders and this can be put as a condition in its articles of association or governing document. The additional costs of requiring this though should be carefully considered.

Founding trustees should be fully aware and comfortable with their responsibilities as a trustee before forming the charity; there is a great resource on this and other guidance available on the Charities Commission website.

Whatever structure you choose, charities are considered asset-locked bodies, meaning you can’t distribute your surpluses or assets (unless at market value) to members and instead can only apply your assets to carry out your charitable purposes as outlined in your governing articles of association. CICs do allow part of these surpluses to be distributed, but this is subject to a cap.

Charities are generally exempt from tax on most of their income unless they have a certain level of trading activity. Advice should be sought if carrying out any trade to raise funds, as steps may need to be taken to guide this.

The gift aid scheme allows the charity to claim additional money from HMRC on donations it receives which can be valuable.

Depending on the type of activities undertaken, charities may be required to register for and charge VAT on certain supplies of goods or services it makes based on the same thresholds for companies. VAT recovery can also be a complex area, so it is best to seek direct advice in this area.

What are the priorities of your charity or enterprise?

Each form of charitable and social enterprise 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 or social enterprise and are weighing up your options, take the time to speak to a specialist adviser who can clearly outline any potential problems or pitfalls you might face.

To ensure that your organisation thrives with good governance and compliance, contact our team today.

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