Not for profit corporate structures – which one is best for us?

It is usually at this point that corporate body status becomes advantageous, so that the organisation can become a separate legal entity, rather than act through its members.

Not for profit companies come in a variety of shapes and sizes, but which is the best structure for your organisation? This will depend on a number of factors, such as if your organisation can be defined as charitable, who your key decision makers will be, and whether you want to pay them.

The following are the main categories of not for profit corporate structures:

Charities 

The advantage of charitable status over all the other structures is that charities are exempt from tax on their charitable activities.  Charities are also able to access a wider range of external funding than other not for profit organisations.

There are 13 descriptions of purposes listed in the Charities Act:

• The prevention or relief of poverty
• The advancement of education
• The advancement of religion
• The advancement of health or the saving of lives
• The advancement of citizenship or community development
• The advancement of the arts, culture, heritage or science
• The advancement of amateur sport
• The advancement of human rights, conflict resolution or reconciliation, or the promotion of religious or racial harmony or equality and diversity
• The advancement of environmental protection or improvement
• The relief of those in need, by reason of youth, age, ill health, disability, financial hardship or other disadvantage
• The advancement of animal welfare
• 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
• Any other purposes currently recognised as charitable or which can be recognised as charitable by analogy to, or within the spirit of, the purposes above or any other purpose recognised as charitable under the law of England and Wales.

For a purpose to be for the public benefit, it must satisfy both the “benefit” and “public” aspects below (although slightly different rules apply if the purpose is to relieve or prevent poverty)

• To satisfy the “benefit” aspect, a purpose must be beneficial and any detriment or harm that results from the purpose must outweigh the benefit.
• To satisfy the “public” aspect, a purpose must benefit the public in general, or a sufficient section of the public, and not give rise to more than incidental personal benefit.

A good starting point is the Charity Commission “five minute guide” on charity purposes and rules:

An unincorporated organisation can have charitable purpose, but is not required to register with the Charity Commission until its annual income reaches £5,000. At this stage it should either apply for registration in its own right, or apply to set itself up as a Charitable Incorporated Organisation (CIO). The CIO gives the benefits of incorporated status without the need for dual registration with Companies House.

Before an organisation can register as a charity, it needs to recruit a board of trustees, and adopt a constitution. Model CIO constitutions, pre-approved by the Charity Commission, are available on the Charity Commission website. We recommend that a solicitor reviews any legal documents.

Charities are not generally permitted to pay their trustees, without special permission being granted by the Charity Commission. They are also subject to limits on their trading activities where their trading is not linked to their primary purpose, and if these are exceeded the trading profit becomes taxable. However a charity is able to set up a separate trading subsidiary company which can then gift its taxable profits to the charity, ensuring that the proceeds all remain within the charity.

Charity registration can be done online via the Charity Commission website. We are happy to assist with the registration process and provide further guidance on this structure and the reporting requirements.

Social enterprises 

Social enterprises are not charitable. They are businesses that aim to make a profit, but reinvest this profit to create positive social change. They exist in nearly every sector, creating jobs and opportunities. These can be incorporated in a number of ways:

Community Benefit Societies

These are registered with the Financial Conduct Authority (FCA) rather than Companies House, and are organisations run primarily for the benefit of the community at large.

They will often be constituted by a set of model rules as defined by the FCA. They may also have an “asset lock” in place meaning that their assets can only be used for the benefit of the community or other limited purposes as defined in their rules. Where an asset lock is in place, the rules will nominate a similar organisation that the assets will be transferred to in the event of the organisation’s closure.

Some community benefit societies have charitable purposes, and are registered with HMRC as exempt charities for tax purposes, allowing them relief from tax. However, the majority pay tax on their surpluses.

Community Interest Companies (CICs)

These are registered with Companies House with some additional reporting requirements to standard limited companies, in order to demonstrate that they meet the “community benefit” requirements.

In order to obtain CIC status, an organisation must pass the “community benefit” test whereby a “reasonable person” would have to consider that the activities are being carried out for the benefit of the wider community. For example, residents of a particular town, people with learning difficulties, the elderly, people who want to learn a particular skill, former workers of a particular industry. The Office of the Regulator of Community Interest Companies has useful guidance in this area.

CICs will generally have an “asset lock” in place similar to that described above for community benefit societies.

To set up a CIC, first a limited company needs to be set up. Once this is done, a separate application to form the CIC needs to be made. This covers the identification of the benefitting community, defining the activities of the CIC and how they will benefit the community, and deciding what surpluses should be used for.

Model CIC constitutions are available, again we would suggest a solicitor reviews any legal documents. We are happy to assist with the CIC setup process and provide further guidance on this structure and the reporting requirements.

Companies limited by guarantee

These are companies registered with Companies House which do not pay dividends. See below for further information. Social enterprises can be CLGs, but not all CLGs are social enterprises.

Companies limited by guarantee (Not for profit) 

Not for profit entities that do not fall into any of the above categories, or wish to avoid the considerable setup costs that would be incurred for a CIC or a charity, can incorporate as a company limited by guarantee. These companies do still have access to grant funding, however the availability of this funding is less than with a CIC or a charity.

As with a CIC, companies limited by guarantee are liable to pay corporation tax on their profits.

A company limited by guarantee can also be registered as a charity at a later stage should this be appropriate and providing the requirements mentioned above are met.

Again we are happy to assist with the setup of a CLG, these tend to come out a little more expensive than a standard company (limited by shares).

If you feel that restructuring into a full not-for-profit is right for you, then we do offer a range of charity accounting and tax services which can let you get on with making a difference.

There are many things to consider when deciding which type of entity is right for your organisation as well as the ongoing reporting requirements. Contact us if you need further guidance on deciding which is the best structure for you, or assistance on setting up your new corporate structure.