As of 2021, there are about 166,000 registered charities throughout the UK. All of these organisations are using their resources to impact the community around them and leave this earth better off than they found it. And for that, they deserve gratitude.
Setting up a charity is no easy undertaking. One of the most difficult parts of the whole endeavour is how to choose a charity structure. There are a lot of options and each one affects the way the local community can be impacted.
As a result, it’s helpful to do some digging before forming any sort of charitable organisation. That’s exactly what we’re here for.
At KG Accountants, our goal is to help charities along their journey to improving the world around them. Board members, volunteers, and charity membership have enough to worry about with daily operations. Let us help with the administrative side of things.
Today, we’re going to guide charities and their managers on making the right choice for the structure of their charity. There’s a lot of information to cover, so let’s get going.
The Types of Charity Structures
There are four types of charity structures that charitable organisations in the UK can choose from. Each structure has different rules and regulations, as well as a slightly different application process.
Charities will want to remain informed on each type of structure. The structure they choose will greatly affect the level of impact they can have on their local community. Here is an in-depth look at each structure to help you make the right choice.
Charitable Incorporated Organisation (CIO)
A Charitable Incorporated Organisation is more than just a charity. This is a form of charity business structure in the UK. And, it’s only available to charities.
The benefit of forming a CIO is that a charity will have a formal business structure. This gives the charity more flexibility because it can perform business transactions in the name of the charity.
Rather than business actions taking place in the name of the trustees, a CIO structure allows the charity to hold property, pursue legal action, and enter contracts. This gives the charity and its board members more flexibility when it comes to their daily operations.
In addition to more control, establishing a CIO will also help to protect a charity’s membership. Structuring the charity in this way will give the members “limited liability”.
Traditionally charities take the form of limited liability companies or LLCs. This makes the finances of a charity much more complicated. A traditional LLC would have to file financial reporting with both the Charities Commission and their local branch of the Companies House.
CIOs, on the other hand, have much simpler reporting requirements. They are only required to submit financial reports to the charities commission. Involving Companies House isn’t necessary at all in the case of a CIO.
The good news is that any existing charity, no matter the structure, can convert to a CIO. But, once established as a CIO, charities can’t convert to any other type of charity. Therefore, it’s important to make sure a CIO is the right fit for your organisation before making the switch.
Charitable Company
A Charitable Company is the most traditional form of charity structure. This is the more traditional form we mention in the section above.
These types of organisations in the UK is limited by guarantee. The members of the charity who direct major decisions are usually referred to as trustees.
What makes a charitable company different from other structures is that it has to answer to both the Charities Commission and Companies House. Any major governing documents or financial statements need to undergo review by both departments.
Despite being a little more complicated, many organisations choose this structure because of the protection it provides. The charity’s members aren’t responsible for any debts or legal action that’s taken against the charity.
Unincorporated Association
An unincorporated association is a “loose” structure used by the UK government to help bring a group of people together. This group needs to be formed for a purpose other than making a profit.
Unincorporated associations can serve volunteer groups, charities, clubs, and other public interest groups. If a charity is looking to keep their organisation more “informal”, this may be the choice for them.
Unincorporated associations don’t need to be registered with either Companies House or the Charities Commission. They also don’t cost any money to set up.
But members of unincorporated associations need to be careful. If they begin to generate any sort of profit, the UK government will need to step in. Once a profit is made, members of the unincorporated association will need to file a tax return just like a charitable company.
The organisation will also need to begin paying the UK’s corporation tax.
Forming a Trust
Another option charities have is forming their organisation as a charitable trust. This is also an unincorporated organisation. That means it’s not viewed as a business in the eyes of the UK government.
Charitable trusts also have no voting members. These organisations are run by a very small group of members known as “trustees”. Trusts also lack the ability to enter into contracts or own property.
Unlike an unincorporated association, charitable trusts do need to register with the government. Any organisation that wishes to form a charitable trust will need to register with the Charities Commission. The organisation will also need to keep a consistent income greater than 5,000 pounds per year.
Trustees within the organisation receive their role via appointment only. There are no election procedures to bring in new members of the trustee group. These trusts are also prohibited from growing wider membership and the trusts must always be charitable.
Organisation founders can establish a charitable trust by signing and submitting a Trust Deed. A sample of the proper documentation is on the Charities Commission website.
Discussing Corporate Structures
The types of charities described above can fall into one of two categories. These organisations can either incorporate or choose to remain unincorporated.
Trusts and unincorporated associations are the two unincorporated models of charities. Charitable Companies and CIOs are incorporated.
In recent years, the CIO has become the most popular type of incorporated structure. The Charitable company is beginning to fall by the wayside.
Establishing an incorporated charity offers these companies a lot of financial benefits such as tax breaks. But, incorporated charities also fall under more scrutiny from the government.
Incorporated charities need to bring on a third-party financial company to audit their accounts if their income is over 25,000 pounds. They’ll also need to submit their annual financial statements to both the Charities Commission and Companies House.
Unincorporated structures receive the benefit of much less government involvement. They also require a lot less paperwork.
These types of structures are best for smaller charities. If a charity isn’t expecting to own property, hire staff, or enter into contracts, unincorporated structures might be best for them.
Charities With Wider Membership
Some charities have a large group of members. These members also have voting power when it comes to major charity decisions. Charities that choose to structure this way usually receive donations from their membership.
A charity with wider membership can’t exist only to benefit the members. Founders need to make sure the charity continues to benefit the public good as well.
Writing A Governing Document
A charity’s governing document is the “backbone” of its daily operations. Each charitable structure has its own governing document that needs to be in place. This document will go on file with the government and has certain requirements it needs to meet in order to be valid.
It helps to think of this document as the organisation’s rulebook. The governing document needs to outline your organisation’s charitable purpose and what actions the organisation can take to achieve that purpose.
Charities will also need to outline who runs the charity, how meetings will be held, and rules about paying trustees or board members. In addition, the governing document will also handle looking after the charity’s money, who’s involved in the decision-making process, and the procedure for dissolving the charity if necessary.
A charity can choose to write their governing document themselves or have it done by an attorney. But the Charities Commission has templates available on their website to make sure charities are following the proper form.
But, if an organisation wishes to write its own governing document, it will need to contain the following sections:
- Names
- Objects (charitable objectives)
- Powers
- Charity Trustees
- Charity meetings and voting
- Membership
- Financial
- Trustee Benefit
- Amendments
- Dissolution
If a charity is incorporated it may cover other business-related items. In this case, the governing document may include how to handle land or property, handing investments, and how to handle corporate disputes.
Changing a Charity’s Structure
Changing the structure of a charitable organisation can be a complex process. Certain organisations, like CIOs, can’t convert to any other structure.
Any charity that wishes to change structure will need to make sure they file the proper paperwork. Templates for most of these forms can be found on the Charities Commissions website.
Board members or trustees will also need to handle the transfer of the charity’s finances. The changing of a charity’s structure may also require a review by the Charities Commission.
Doing Good Well
We hope this article helps the charities out there do good well and figure out how to choose a charity stucture. Actually, we hope it helps those organisations do good better!
It can be a bit of a challenge going through the different types of charities.
KG Accountants is here to help any companies that wish to learn how to set up a foundation or how to set up a charity. If you have any questions or want more information, contact us today.
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Categories: Charitable incorporated organisation (CIO), Charitable Incorporated Organisation (CIO), Charitable Incorporated Organisations, Charitable trust, Charities, Charity, Charity registration, Company limited by guarantee, Unincorporated association, Unincorporated association
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