Before attempting to set up a charity, you must have a clear understanding of what it means to be a charity and if this is the right option for you. This article defines what a charity is, discusses the different legal structures that can be used to set up and run a charity, and provides guidance on setting up a charity.
Starting a charity is not an easy matter. It requires a great deal of determination and commitment. However, seeing the impact of your work in running a charity can be an incredibly worthwhile experience.
What is a charity?
In order to be officially classed as a charity in England and Wales, an organisation must meet the legal definition of a charity. The Charities Act 2011 defines a charity as an institution that is established for charitable purposes, namely one or more of the following:
(a) the prevention or relief of poverty
(b) the advancement of education
(c) the advancement of religion
(d) the advancement of health or the saving of lives
(e) the advancement of citizenship or community development
(f) the advancement of the arts, culture, heritage or science
(g) the advancement of amateur sport
(h) the advancement of human rights, conflict resolution or reconciliation, or the promotion of religious or racial harmony or equality and diversity
(i) the advancement of environmental protection or improvement
(j) the relief of those in need, by reason of youth, age, ill-health, disability, financial hardship or other disadvantage
(k) the advancement of animal welfare
(l) the promotion of the efficiency of the armed forces of the Crown, or of the efficiency of the police, fire and rescue services or ambulance services
(m) any other purposes which could reasonably be regarded as charitable in line with the law on charities in England and Wales
Note: These listed purposes are not themselves defined other than by Annex D in this government guidance.
As well as falling within the purposes listed above, a charitable purpose must also be for the public benefit (known as the public benefit requirement). According to the Charities Act, the trustees of a charity must have regard to the Charity Commission’s public benefit guidance “when exercising any powers or duties to which the guidance is relevant.”
In addition to having a charitable purpose and fulfilling the ‘public benefit’ requirement, the organisation must also be subject to the control of the High Court’s charity law jurisdiction (i.e. the court must have the power to make decisions about the administration and purposes of the organisation as a charity). In effect, this means that a charity registered in England and Wales cannot be subject to the jurisdiction of another country (e.g. Scotland, Northern Ireland, etc.). This should be made clear in the organisation’s governing document (see below).
The legal structures suitable for a charity
There are essentially four different types of legal structures which can be used to set up a charity, as follows:
1. Charitable company limited by guarantee
A limited by guarantee company is generally a non-profit organisation that does not have a share capital and whose members are guarantors instead of shareholders. The liability of its members is limited to the (usually nominal) amount they agree to contribute to the company’s assets if the company is wound up.
Profits of companies limited by guarantee cannot be distributed to members if it is to be eligible for charitable status. In terms of registration and filing of accounts, it must deal with both Companies House and also (normally) the Charity Commission.
As it is a corporate structure, a charitable company limited by guarantee has the legal capacity to carry out various business activities in its own name, such as:
- to employ paid staff
- to deliver charitable services under contractual agreements
- to enter into commercial contracts in its own name
- to own freehold or leasehold land or other property
2. Charitable incorporated organisation (CIO)
A CIO is an incorporated structure specifically designed for (and only available to) charities. It differs from a charitable company limited by guarantee mainly because there is no need to register and file accounts with Companies House – only the Charity Commission.
Since a CIO is also a corporate structure, it has the same legal capacity as a charitable company limited by guarantee.
3. Unincorporated association
An unincorporated charitable association is most suitable for groups of volunteers who wish to run a charity for a common purpose. However, it is restricted because it cannot employ its own staff or own any premises.
Since it is not a corporate body, it does not have the legal capacity afforded to charitable companies limited by guarantee or CIOs, therefore:
- the trustees are personally liable for what it does
- it is unable to enter into contracts or control certain investments in its own name
- two or more trustees, a corporate custodian trustee or the charities’ land holding service will be required to hold any land on the charity’s behalf
4. Charitable trust
A charitable trust enables a group of people known as trustees to manage assets including money, investments, land, or buildings. Just like an unincorporated association, a charitable trust is not considered to have legal capacity in its own right.
How to set up a charity
Requirements for all charities
Official Name – A name should be chosen for the charity. This should not be similar to the name of another charity. Although the words ‘charity’, ‘charities’ or ‘charitable’ can be used in a charity’s name, it is necessary to obtain approval from the Charity Commission if these are used when registering a company name with Companies House. For more information on charity names see GOV.UK – name your charity.
Board of trustees – it is necessary to create a board of trustees for a charity, ideally with at least three trustees. These are essentially the people who manage a charity, similar to a board of directors in a company. For more information on charity trustees see GOV.UK – trustee board people and skills.
Governing document – a governing document must be written for the charity which sets out how it is run and should include:
- Objects – its charitable purposes
- Powers – what it can do to carry out its purposes (e.g. borrowing money)
- Trustees – who runs the charity and who can be a member
- Meetings – how these will be held and how trustees are appointed
- Payments – any rules about paying trustees, investments, and holding land
- Amendment provisions – whether the trustees can change the governing document, including its charitable objects
- Dissolution provisions – how to close the charity
Note: Model governing documents can be downloaded from the Charity Commission.
Charitable company limited by guarantee
Registration of a company limited by guarantee can be done online in the usual way. However, it’s important to note that a charitable company will always remain distinct from a commercial company: since it’s limited by guarantee rather than shares, it cannot distribute its surpluses to its members or shareholders; it can only apply its assets to carry out its charitable purposes; and it must operate in a way which is in the best interests of the charity.
A name, board of trustees, and governing document are required. For charitable companies limited by guarantee, this governing document will normally be the articles of association.
To help organisations set up a charitable company limited by guarantee, Quality Company Formations offers a Charity Package at a cost of £49.99 plus VAT, which includes company registration using Model Charity Articles (into which you can edit and insert your company’s objects).
Charitable companies based in England or Wales with an income of at least £5,000 per year are required to register with the Charity Commission.
Charities may wish to register their details with HMRC to reclaim tax on things like Gift Aid donations.
Charitable incorporated organisation (CIO)
There is no requirement to register a CIO with Companies House. Instead, CIOs just need to be registered by the Charity Commission to legally come into existence. A name, board of trustees and governing document is required. For CIOs, this governing document will depend on the type of CIO:
- Foundation CIO – this is suitable for charities where the only members are the trustees and a wider membership is not required. The Charity Commission’s model foundation CIO constitution can be used as a governing document.
- Association CIO – this is suitable for charities that have a wider membership, including voting members other than the charity trustees. The Charity Commission’s model association CIO constitution can be used as a governing document.
A register of trustees and members (the trustees are the only members in a Foundation CIO) must be kept, and accounts and annual returns must be sent to the Charity Commission each year regardless of income.
Note: The £5,000 threshold for registering with the Charity Commission does not apply to CIOs – they must all register with the Commission irrespective of income.
Charitable trusts and unincorporated associations
As these are not incorporated structures, they do not need to be registered with Companies House. However, charitable trusts and unincorporated associations based in England or Wales with an income of at least £5,000 per year are required to register with the Charity Commission.
A trust deed should be used as the governing document for a trust.
A constitution should be used as the governing document for an unincorporated association.
Note: A model trust deed and constitution can be downloaded from the Charity Commission.
Registration with the Charity Commission
Charities based in England or Wales with an income of at least £5,000 per year – and all CIOs irrespective of income – are required to register with the Charity Commission. In order to register you will need to answer questions about your charity including:
- its stated charitable purposes
- how it is run for the public benefit
- proof that the annual income is above £5,000
- bank or building society details
- most recent accounts
- contact details, including a postal address
- trustees’ names, dates of birth and contact details
- a copy of your charity’s governing document (in PDF format)
- proof of income (these can be the charity’s latest ‘published’ annual accounts, a recent bank statement or a formal offer of funding from a recognised funding body)
Running your charity – ongoing filing requirements
Charitable companies limited by guarantee are required to submit confirmation statements and annual accounts to Companies House, in the same way as any limited company.
Charities may also need to submit tax returns with HMRC – see GOV.UK – charities and tax for more information.