Charity structures: Finding the right one for you.

A common question we are asked is, “What is the right structure for my charity?” Choosing the right structure for your charity is not a simple binary question as there are a number of structures available. What is right for you and your charity depends on your aims, activities, and the level of personal risk you are willing to accept. In this article, we will look at some of the common structures for charities and social enterprises, along with some of the pros and cons. However, before setting up, ensure you take appropriate business and legal advice.

First Steps

Before choosing a structure, identify your charitable purpose(s) or objectives. This will clarify what your charity or social enterprise will do, where it will operate, who it will benefit, and how. This understanding will guide you in deciding whether to structure your activity as a charity or a social enterprise, and then to the appropriate structure.

Charity or Social Enterprise – The Same Thing?

Charities and social enterprises are often confused, as both are “doing good.” However, they have distinct differences in their legal structure, funding models, and how they operate.

In essence, social enterprises blend business with social impact, while charities focus on providing direct aid and support through non-profit means.

Types of  Structures

Now that you’ve defined your activities, it’s time to consider the appropriate structure.

This is not an exhaustive list and there are other structures available for social enterprises, for example, sports organisations might register as a community amateur sports club (CASC).

NB If a sports club registers as a CASC, it will receive tax reliefs and other benefits specific to CASCs, but it won’t be recognised as a charity for tax purposes.

Choosing the right structure from the start is crucial, as it impacts how your charity or social enterprise operates, including:

• Where / who the liability of the charitable activity sits with;
• What legislation is relevant to the charity’s activities;
• What regulator oversees the activities of the charity; and
• What the compliance requirements are for the charity.

Unincorporated Charitable Association

This is the simplest structure for small charities with annual resources under £5,000, minimal contracts, and low-risk activities. You don’t need to register with the Charity Commission, administrative work is minimal, and setup is quick. However, personal liability applies if issues arise, and some funding and banking options may be limited to registered charities.

Charitable Trust

Traditionally, charities have been set up as Charitable Trusts with a Trust deed. Trusts only need to register with the Charities Commission and have no Companies House reporting requirements. The trust will have charity status; however, trustees have unlimited liability, like unincorporated charitable associations. The rest of the structures we look at have their own separate legal identity. This means:

• There is limited liability for those running the charity; and
• The charity will enter contracts / hold assets in its own legal name.

Company Limited by Shares

A company limited by shares is the most common legal structure for entities in England and Wales, with owners’ liability limited to their investment and profits distributable to them. These companies are easy to incorporate but can’t register as charities or gain tax benefits, making them generally unsuitable for charities. However, a company limited by shares may be relevant if you are considering a social enterprise model. Recently, more companies are adopting the benefit corporation model (e.g., Ben & Jerry’s, Patagonia) with certifications like B Corp by B Lab, introduced in the UK in 2015. Over 2,500 UK businesses are now B Corp certified. This certification suits for-profit companies balancing profit with purpose, though it requires rigorous and ongoing compliance.

Charitable Company – Limited by Guarantee

A Charitable Company is a separate legal entity limited by guarantee, not by share capital, and cannot distribute surpluses. Prior to the introduction of CIOs in 2013, a charitable company was the most common choice of structure for charities. A key benefit of an incorporated charitable company is that the liability of the Trustees is limited (commonly to £1). It is registered with the Charity Commission, so obtains charity status for UK tax purposes (NB watch out for trading activity that may result in some activities of a charity being subject to tax). It is also a “familiar” structure so there can be benefits when looking to open bank accounts, for example. However, it must report to both the Charity Commission and Companies House, requiring dual compliance.

Community Interest Company (CIC)

Introduced in 2005, CICs (Community Interest Companies) aim to benefit local communities and are registered with Companies House and the CIC Regulator. They can be limited by shares or guarantee, with most being the latter. Advantages include the ability to pay Trustees, easier property introduction, and shared profits/assets between the CIC and owners. An asset lock ensures assets and surpluses benefit the community, which is useful for community-focused assets such as community gardens. CICs are considered easier to set up than charities, making them an attractive alternative. However, CICs lack charitable tax and VAT exemptions and can’t claim gift aid. They also require ongoing compliance with Companies House and the Regulator of CICs. CICs are popular with social enterprises for trading and distributing profits with a social purpose and are also a popular option to be subsidiaries of charities and undertake any taxable activities arising.

Charitable Incorporated Organisation (CIO)

Charitable Incorporated Organisations (CIOs) were introduced in 2013 in response to calls to reduce the reporting burden by only requiring registration with the Charities Commission, while retaining limited liability protection of an incorporated entity. There are two types: Foundation CIOs (only trustees vote) and Association CIOs (wider membership). The choice depends on your charity’s operations. CIOs are popular with small and new charities. However, as CIOs are not required to register with Companies House, there is no public register of charges, which may affect borrowing.

Ongoing Compliance

Once set up, your organisation will have ongoing compliance requirements, varying by structure. This ranges from internal record-keeping to statutory audits and reporting to Companies House. For charities, if annual income exceeds £25,000, an Independent Examination of accounts is required and for income over £1 million, a full audit is necessary under the Charities Act, and possibly the Companies Act also.

Key Considerations

• What are your objectives / purpose(s)?
• What activity will you be doing? Is there an unacceptable level of risk?
• Is the charity likely to benefit from tax exemptions?
• What assets will your charity hold?
• Will you be applying for grants or for loans?
• What resource do you have to manage ongoing compliance?

In conclusion, choosing the right structure for your charity or social enterprise in the UK is crucial for its success and sustainability. Each structure offers different benefits, from the simplicity of unincorporated associations to the robust framework of Charitable Companies. Understanding your charity’s or social enterprise’s goals, activities, and risk tolerance will guide you in selecting the most suitable structure.

Regardless of the structure you opt for, it’s essential to consider the implications for liability, tax and operational efficiency. Additionally, ongoing compliance requirements, such as audits and annual reporting, must be factored into your decision. By carefully evaluating these factors, you can ensure your charity is well-positioned to achieve its mission and make a positive impact in the community.

If you would like to discuss any of the areas detailed above, please contact one of the team below.