Most guides on becoming self-employed focus on the choice between operating as a sole trader or limited company. But what if you’re aiming to build an organisation to help people and communities, benefit the environment, or support other worthwhile causes? Understanding how to start a charity or non-profit business can save you time and money.
There are several different business structures available for charities, non-profits, and social enterprises, with rules and restrictions varying widely depending on your choice. While you can introduce a social, charitable, or community-based objective to your existing business as a sole trader or limited company, there are various benefits available to dedicated organisations.
While the wide range of options can seem overwhelming at first, as you define the purpose of your charity or non-profit, the most logical choices will soon become apparent.
- Define the purpose of your charity or non-profit
- Research relevant existing charities and organisations
- If you just want to raise money for a cause
- Legal requirements and restrictions for charities
- Types of charity structure
- Community interest companies
- B Corporation
- More support for starting a charity or social enterprise
Define the purpose of your charity or non-profit
Having clear aims for your organisation is extremely important for any business, and it’s vital for a non-profit or charity. The Charities Act 2011 defines the specific charitable purposes which are a requirement to set up a new charity. But even if you choose an alternative option for your business, precise and unambiguous objectives will encourage other people to help and support you.
As with any business, it’s easier to attract attention if you have a unique selling point and effective elevator pitch. Whether that’s tackling a specific issue, focusing on a local area, or supporting a particular group of people.
Areas to cover include:
- The ultimate objective of your organisation
- How you aim to achieve those objectives
- Who will benefit from your work
- How those people, and anyone else, will be impacted
- The amount of funding and support required
You’ll also need this information when you’re applying for grants or funding schemes. And as a starting point for a more detailed business plan, setting out timelines, milestones and challenges.
Research relevant existing charities and organisations
It’s important to know whether any existing charities and organisations are already working on the same issues. In many cases, it may be more effective to work with them, rather than setting up an alternative to compete for the same resources and funding.
Or it might help you focus on a different area of the problem you want to tackle. For example, Diabetes UK helps people with both type 1 and type 2 of the disease with support, treatment, and care. But the Juvenile Diabetes Research Fund (JDRF), is focused on funding research to cure, treat, and prevent type 1 diabetes. So, while they overlap, there’s also a clear distinction between the two charities, which means I support both rather than choosing between them.
And if you find that there’s currently a gap that can be solved by your efforts, the organisations you’ve researched will be a useful list of contacts and potential partners for advice, support and to potentially work together in the future.
It’s also important to ensure that the name of your charity or non-profit isn’t too similar to that of an existing organisation, which would stop you registering it with either the Charity Commission or Companies House.
You can search for registered charities via the Charity Commission, along with general internet searches to check for unregistered charities, non-profits, and social enterprises. It’s also worth repeating the exercise each year as part of reviewing your business plan and activity, to see if any new organisations have launched in the 12 months since you last checked.
If you just want to raise money for a cause
You don’t need to set up a charity or non-profit if you decide you want to raise money for a particular cause. Instead, you can set up a named fund or trust.
The benefit is that you save the time, effort, and costs of setting up and running your own organisation. Many charities will support you with fundraising efforts, you can set up a fund through a community foundation, or use a CAF Charitable Trust rather than creating your own foundation.
If you’re setting up a fund or trust on behalf of yourself or your business, it’s important to fully understand the legal and tax implications by speaking to an independent specialist advisor. Especially if you’re intending to claim income or capital gains tax relief as a result of your charitable giving.
Legal requirements and restrictions for charities
Any charity will need both charitable purposes and a governing document (which creates the charity and says how it should be run).
There are also specific laws and guidance applicable to running a charity. For example, charities can campaign, but can’t have a political purpose or undertake political activity that isn’t relevant to their charitable purposes.
Trustees and founders, or anyone connected to them, can’t receive a personal benefit unless it’s classed as ‘incidental’. And decisions need to be made in accordance with the principles laid out by the Charity Commission for England and Wales (or the Office of the Scottish Charity Regulator and The Charity Commission for Northern Irelandwhere applicable).
It’s particularly important to understand the rules around charity accounts, financial reporting and tax, given the range of relief available on most types of income. And the ability to claim back tax on bank interest and donations (known as Gift Aid).
Types of charity structure
It’s possible to change the structure of a charity at any point, but this can be complex and expensive, requiring specialist professional advice. Choosing correctly at the start can save you a lot of time and money in the future.
The four main types of charity structure are:
- Charitable incorporated organisation (CIO)
- Charitable company (limited by guarantee)
- Unincorporated association
Similar to the split between sole trader and Limited Company, there are specific limitations if you’re running an unincorporated charity, including trustees remaining personally liable, and being unable to enter into contracts under its own name.
These include trusts, if you’re not intending to have a wider membership, and an unincorporated association if you do.
A CIO or charitable company is a corporate body which can employ paid staff, deliver charitable services under contractual agreements, own property, and enter into contracts in its own name. You can opt for an association CIO for a wider membership or foundation CIO with a more limited number of members, or a charitable company, which is subject to specific rules compared to commercial businesses, such as being unable to distribute surplus money via shares.
You’re required to register with the Charity Commission in England and Wales if your income is at least £5,000 per year, or it’s a charitable incorporated organisation (different rules apply for Scotland and Northern Ireland).
You’ll also need to register with HM Revenue and Customs to claim tax back, such as Gift Aid donations.
Community Interest Companies
If setting up a charity seems too complicated or restrictive, then there is a quick and simple alternative available to set up an organisation that helps people and communities as a social enterprise.
While you can choose to just operate as a sole trader, business partnership, limited company, or co-operative, just like any other business, this doesn’t provide any guarantees to shareholders, donors, or funds that you’ll continue to operate for public good in the future.
But a community interest company (CIC) is a specific type of limited company, existing to benefit the community rather than private shareholders. This requires a ‘community interest statement’ explaining your business plans, a constitution, and an ‘asset lock’ which is a legal promise that the company assets will only be used for the social objectives, and limiting the money it can pay to shareholders.
When you register your CIC online with Companies House at a cost of £27, your application will be sent to the community interest company regulator for approval.
The benefit of a CIC compared to a charity is that it can be more flexible about the activities it does, doesn’t require trustees, and directors can be paid subject to regulations. There are also less reporting and admin requirements.
But unlike a normal limited company, the statutory clauses and asset lock provide regulation and reassurance that it will act for a social benefit.
Unlike charities and CICs, B Corporation is a private certification created by a non-profit organisation founded in 2006, which indicates they meet certain standards of transparency, accountability, and sustainability.
It doesn’t confer any legal or tax status, and there is an application fee involved. It also requires you to potentially amend your legal structure or articles of association to show a commitment to being a responsible business, and to write an annual impact report.
Limited companies and CICs can apply to be certified as a B Corp, but it’s not applicable to charities.
While becoming a B Corp may have benefits, it’s not a business structure or legal alternative to registering as a charity, CIC, trust, or foundation.
Representing and supporting the self-employed in the UK, IPSE membership includes those starting a charity or social enterprise. We’re currently documenting the journey of IPSE member Maxine Binger, founder of an education startup, and IPSE members have been involved with a variety of CICs and purpose-led businesses..
Other useful organisations include Social Enterprise UK and UnLtd, the Charity Commission for England and Wales, the Office of the Scottish Charity Regulator, and the Charity Commission for Northern Ireland, along with associations representing charities in specific sectors (for example medical charities or benevolent charities).
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