Posted by Deanna Hurst, Partner
Charity structure – what is best for your charity
Once you have decided that you want to set up a charity, you need to choose which structure would best suit its aims.
There are four broad types of structure:
- Charitable trust – your charity is run by a board of trustees and if it owns property or wishes to enter into contracts, it must do so in the name of the trustees directly.
- Unincorporated charitable association – in addition to a board of trustees (see above) there is also a group of members who may vote on certain decisions taken by the charity. The board of trustees will be the named owners of any property that is held on behalf of the charity.
- Incorporated charitable company limited by guarantee – like any company, this charity can enter into contracts, employ people and own property in its own name. It must also comply with both Companies House and Charity Commission regulations although its tax treatment will still be the same as that for charities.
- Charitable incorporated organisation – has characteristics similar to that of a company, such as being able to hold property directly and employ people but reports only to the Charity Commission. It is the latest charity vehicle and is gradually becoming much better known.
It’s important to recognise the structural differences between a company and an incorporated charity – the terminology can sometimes hint at barely-there differences but in practice there are significantly different principles guiding the running of each type of organisation. For example: both can have directors whose roles will share similarities but they will also have some key differences.
Each type of charity vehicle has different regulations which will have their own corresponding advantages or drawbacks (for example if you need to hire employees). Decisions such as what you want to achieve with your charity, whether you will need to employ people or simply make grants to other organisations or beneficiaries will help you decide which structure is the best fit for you.
Where the charity’s income comes from will need to be considered; private pledges and donations; Government funding; commercial activities or a variety of different income streams so the charity can be sustainable going into the future.
The tax implications of your charity’s structure must be understood. Issues such as the application of VAT in relation to any trading arm or income tax and national insurance on employee salaries will all affect your choice of structure.
If a trading arm is required or in existence then it is important to be sure that your charity has been set up in the most appropriate way to deal with this. Transparency of the charity’s purpose will be crucial since this element can attract criticism by those who may be sceptical of its purpose. Many charities create a trading subsidiary to help them generate income and achieve sustainable growth. However, it is important to ensure:
- the reason for creating the trading subsidiary is well understood and agreed at board level, and
- the trading subsidiary is properly structured and managed so that it can withstand public scrutiny.
Where charities fail to prepare for all these elements, they can be vulnerable to unfavourable public opinion and scrutiny by their regulator – the Charity Commission.
Age UK was on the receiving end of some criticism in the press in January 2016 in relation to the relationship its commercial arm has with energy provider E.On. Such an area can be an easy target for critics who may be sceptical about a charity engaging in such self-sustaining activity.
The (perceived) delay of Age UK in responding to the story led to additional speculation and criticism. When it did publish a full response, the slight delay, in the full glare of 24/7 media scrutiny, proved a mistake. A quicker response would have enabled them to better control the damage caused and regain the trust of their supporters.
This case is a good example of a charity carrying out an activity it is permitted to do to maximise its income but which may not seem fitting to the wider public.
Lastly, trademarks, intellectual property (and, on occasion, rebranding) are more examples of issues which can affect all organisations – including charities. They can be essential in helping a charity grow and be ready for the future. Both the practical steps in ensuring these are properly dealt with and the public relation element are equally important and must be approached with care.
For more detailed information read our factsheet on Getting started.
If you’re setting up a charity and need help deciding on which structural vehicle is best for the charity’s purpose contact our specialist charities team
0800 923 2077 Email us
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