The right legal structure is fundamental to the smooth running of any organisation. Anyone who sets up a project for the benefit of the community has to make a number of crucial decisions
- Is it or can it be a charity?
- What does it mean to be a charity?
- Is another form of social enterprise more suitable?
- What legal structure should be used?
The definition of a charity is straightforward. It is any organisation set up for exclusively charitable purposes and for the public benefit. The purposes must be expressed in the objects of the charity, which must be tightly drafted to make sure that the charity’s funds cannot be used for a non-charitable purposes but at the same time sufficiently flexible to allow the charity to operate in a changing environment.
How can our charity solicitors help?
We can provide the initial advice about setting up a charity, organisation or project, advising upon whether it is capable of being a charity and upon the most suitable legal structure. Our charity solicitors will draft a suitable governing document and register it with the appropriate authorities – Companies House, the Charity Commission, the Financial Conduct Authority and HMRC.
Charity legal structures
A charity can take many legal forms:
- A trust: Historically charities were, with very few exceptions, set up as trusts. The trustees signed a deed of trust declaring that they held certain property on trust for defined charitable purposes. Setting up a charity can still be done in this way but it has disadvantages. The charity cannot enter into any commitments in its own name or hold the title to any land. All contracts are entered into by the trustees personally and although the trustees are entitled to an indemnity form the charity, the prospect of personal liability means that most charities are now incorporated, either as a company limited by guarantee or as a charitable incorporated organisation or CIO.
- A company limited by guarantee: A company limited by guarantee is a like a company limited by shares but instead of shareholders it has members. Each member guarantees to pay a nominal amount, usually £1.00, towards the debts of the company if it is wound up because it is insolvent. The liabilities are however those of the company and not the members personally. The directors, who are the charity trustees, will not incur any personal liability unless there has been serious mismanagement.
A charitable company limited by guarantee must first be registered at Companies House and then, provided that it can demonstrate that it will have an income of more than £5,000 a year, it must be registered with the Charity Commission.
- A charitable incorporated organisation: A CIO is a type of company created exclusively for charities under the Charities Act 2011. It is registered only with the Charity Commission and Companies House plays no part in its regulation. There are two types of CIO, the Foundation Model in which the the same people are both the charity trustees and the members and the Association Model in which there is a membership that is wider than the trustees and which normally elects the trustees.
There are model constitutions for CIOs on the Charity Commission website but most CIOs require some amendments to the model to suit their own situation.
- An unincorporated association: An unincorporated association is simply a group of people who decide to work together for a particular purposes under the terms of a constitution or legally binding agreement between them. It is perfectly possible for an unincorporated association to be a charity if the objects set out in the constitution are exclusively charitable but the risk of personal liability mean that most charities are now set up as company limited by guarantee or a CIO.
- A community benefit society: Community benefit societies were formerly called industrial and provident societies but the name was changed by the Co-operative and Community Benefit Societies Act 2014. A charitable community benefit society is an exempt charity: it is registered with the Financial Conduct Authority, not the Charity Commission and it is not subject to large parts of the Charities Act.
- Other Legal Forms: There are other legal forms of charity but they are less common: charities can be established by Royal Charter or by statute
What are the benefits of being a charity?
Being a charity has significant benefits. Public services are increasingly being put out to contract and many public sector bodies are more willing to contract with a charity. Grant makers and donors too may be reassured if the potential recipient of a grant is a charity.
There are also very significant tax advantages in charitable status:
- 80% mandatory rates relief on business premises occupied for charitable purposes and discretionary relief for the remaining 20%
- Gift Aid relief on donations
- Relief from corporation tax
- Inheritance tax relief on legacies
The advantages of charitable status means that charities are more heavily regulated than other organisations. [link to regulation page].
Charitable status does not depend upon registration with the Charity Commission. An organisation is a charity if its objects are charitable and those who are running it must register it with the Charity Commission if its income exceeds £5,000 a year.
The only exceptions are CIOs, which do not come into existence until registered with the Charity Commission and Community Benefit Societies , which do not come into existence until registered with the FCA.
Surprisingly, there is no definition of a “social enterprise”. Essentially, it is any business in which the primary motive is to benefit to the community, probably in a way that the law would not recognise as charitable.
A social enterprise can be more flexible than a charity because it is not subject to the same regulation. It does not for instance have restriction upon payments to its members of its committee or directors. The other side of the coin however is that it does not have the advantages, and particularly the tax advantages of a charity.
A Social enterprise can take any of the legal forms outlined above with the exception of a CIO. There is however one form of company, specifically designed for social enterprises, the Community Interest Company or CIC. A CIC is registered with Companies House and regulated by the regulator of community interests companies. There are restrictions upon the extent to which its objects can be changed and upon payments to members and directors but they are not as strict as a charity. Intended as a halfway house between a commercial company and a charity, the CIC has not been used as extensively as expected, largely because it does not have any tax advantages.
Clubs and Societies
Any club or society will require a form of constitution to regulate the relationships between its members. Larger organisations will often be set up as a company limited by guarantee in order that the committee should have the benefit of limited liability.