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How to overcome the legal and financial challenges of starting a non-profit

| Niall Kingsley | 18 October 2023

There are at least 168,850 registered charities in England and Wales - which bring in a combined total of almost £84 billion a year. However, every charity and non-profit-making organisation has to start somewhere, and often, the most challenging step can be the first.

What are the legal and financial challenges to starting a non-profit? And, more importantly, how can you successfully navigate them? Let’s explore your options.

Lead with structure and governance concerns

You likely already have an idea of what you’d like to accomplish - but now you need to decide which legal structure is right to help you achieve it.

This can be a difficult decision for even the most well-informed of us, but luckily, we’ve put together a handy ‘how-to’ guide, which you can access here.

One to keep in mind as you go is the rules around charities and trading as there may be a requirement to account for tax or set up a subsidiary. You can read more on this in our previous blog.

Use guidance templates to minimise paperwork

Once you’ve settled on the most advantageous structure for your needs, your next challenge will be to create a governing document that will underpin how you operate, define your remit, and set out your intent.

You can create one of these from scratch, providing it meets the legal requirements, or you can opt to tailor an existing template to suit your needs. There are templates available from both Companies House and The Charities Commission, so I’d advise you to look at the options out there before sitting down at the drawing board.

Abolish ambiguity with procedural guidelines

Of course, throughout this process, professional legal advice will be absolutely priceless and should be sought as required.

You’ll need to cover more ground than you might think, including setting clear parameters on your procedural requirements, how meetings will be held, what constitutes a ‘valid’ meeting, how votes should be cast, and other variables that will need to be squarely pinned down.

Critically, trustees will need to be made aware of their legal duties, their responsibilities, and indeed their liabilities. Depending on which structure you choose, trustees may have to enter into contracts either in their own name or the charity will become its own legal entity and they will sign on its behalf.

There is comprehensive guidance on this available from The Charities Commision; I’d advise you to start with ‘The Essential Trustee’ guide.

Also, while it might seem far-sighted, founding trustees must be made aware of what would happen upon your charity’s dissolution. If you were to cease operating and close your doors, what are their legal requirements? And what costs could these incur? Make sure this is all clearly understood from the outset.

Apply to HMRC to claim exemption and reliefs

Remember to apply to HMRC for all relevant exemptions, including Gift Aid. Again, this can be a lot to get your head around - but, by allowing you to claim a potential 25% boost from any donations you receive, it can’t be overlooked.

You can read more about this in more detail in my recent blog post here.

Account for your payroll and VAT costs

It pays to remember that payroll and VAT legislation applies to charities as much as they do businesses, so make sure you pay close attention to the relevant legislation.

Depending on the size and structure of your non-profit, at any given time, you may need to have your accounts independently examined or audited - so ensure that your books are as steadfast and as transparent as your cause.

Keep appropriate reserves

While each charitable organisation has its own uniquely noble intentions, we know from experience that non-profits in the charity sector are frequently forced to compete for funding.

The cost of living and inflation are making this no easier, so take time to consider if setting up your own independent non-profit is the best option. Could you possibly support an existing organisation instead?

In this same vein, it is increasingly important to ensure that your non-profit has an appropriate level of reserves. I recommend investing in a robust Reserves Policy which is constantly reviewed and adapted based on plans, budgets, financial commitments, and all tied into your Charity Risk Register. Charities should be budgeting and preparing cash flows, just like any business.

With so much to consider, it’s easy to get waylaid by the details. If you’re interested in setting up your own charity or non-profit and are unsure of your next logical steps, ​​get in touch with our specialist team today.

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