Should I set up a charity?

Charity Collection BoxAccording to the Charity Commission, a charity is an organisation set up to benefit the public through:

  • the relief of financial hardship;
  • the advancement of education;
  • the advancement of religion;
  • certain other purposes for the benefit of the community.

What are the advantages of being a charity?

The advantages to being a charity may include:

  • people are more likely to offer time, energy or money to a registered charity;
  • many grant-makers and other funders only give to charities;
  • many organisations offer free or discounted help and advice to charities;
  • charities receive a wide range of tax breaks, including the ability to reclaim Gift Aid.

What are the restrictions and rules?

Restrictions and rules involved in being a charity may include:

  • the organisation must operate strictly within the limits set out in the governing document;
  • the organisation cannot benefit anyone you have a relationship with;
  • your ability to take part in political activities and trading with other companies will be limited;
  • your organisation can't be set up for the benefit of a specific named individual or individuals;
  • trustees cannot usually be paid or gain financially from the work of the charity;
  • an annual return must be submitted to the Charity Commission each year, accompanied by examined or audited accounts, depending on the charity's size.

Do I need to register as a charity?

Twenty pound notesThere is no requirement to register as a charity unless an organisation wishes to be considered charitable. To become a charity in England and Wales you must apply to the Charity Commission for charitable status.

The Charity Commission has a detailed section - called Setting up a charity - of things to consider when thinking about setting up a charity, including: Is a new charity the best way forward? Are there existing charities with the same purposes and activities as yours?

Stewardship also provide a charity formation service although they do charge for this service.


How do I set up a charity?

The key requirements if you do set up as a charity are as follows:

  • all charities must operate within the constraints of charity law;
  • charities must have (and carry out) wholly charitable purposes and activities;
  • all charities must be set up for the public benefit;
  • charity trustees must understand what is expected of them.

What type of charity?

There are four main types of charity, each with different governing documents and suitable for different purposes. The key decisions about which is most suitable for you depend on the required structure and membership.

Type of organisation Unincorporated association Trust Charitable incorporated organisation (CIO) Company limited by guarantee
Foundation CIO Association CIO
Structure Unincorporated: trustees are personally liable for what it does, it cannot enter into contracts or control investments and land must be held by two or more trustees, a corporate custodian or the charities' land holding service. Corporate body: the law considers it to be a person and therefore it can employ paid staff, enter contractual agreements and own land or property.
Membership Wider membership who vote on important decisions at AGMs (e.g. trustee appointments or constitution changes). No wider membership. Wider membership who vote on important decisions at AGMs (e.g. trustee appointments or constitution changes).
Governing document Constitution or rules Trust deed, declaration of trust deed of trust Constitution Articles of association
Trustees are called Executive or management committee members. Trustees. Board, council of management, directors.
Reporting Annual report and accounts to Charity Commission if annual income over £5,000. Annual report and accounts to Charity Commission regardless of income. Annual report and accounts to Charity Commission plus additional reporting to Companies House.
Legal points Legal advice is not normally required. Legal advice may be required but may not be necessary You must keep a register of trustees (and members if association CIO).

Legal advice may be required but may not be necessary.

Subject to additional requirements of company law which an be onerous.

Legal advice is always required

The Charity Commission publications CC22a - how to choose a structure and CC22b - how to write your charity's governing document explores this in more detail and gives links to model governing documents. These model documents need to be adapted to your context, but the closer you stick to them the quicker and easier the registration process is likely to be.

Get your objects right

AccountsTo be a charity your organisation must have purposes ('aims' or 'objects') which are all exclusively charitable. These objects are very important as they determine what your organisation can (and can't) do.

They need to be general enough that your organisation is not unnecessarily restricted, but specific enough that your organisation has a clear purpose and is definitely charitable.

The Charity Commission provide model objects (Example charitable objects) which can be used or adapted as required.

Incorrectly, badly worded or non-charitable objects are by far the biggest cause for charitable applications being rejected, so care is needed.

Clearly using one of the model objects exactly 'as is' will ensure that the application is not rejected on these grounds, but it is very likely that you will need to adapt one of the model objects to your own context.

If, on receiving your application, the Charity Commission are not happy with your objects, they will contact you with suggested alternative objects which they are happy with.

You may be happy to complete the application with one of these alternatives, but don't be afraid to contact the Charity Commission to negotiate – they are usually very helpful in agreeing a set of objects which satisfy both your and the legal requirements.

Choosing the right trustees is very important

CalculatorThe Charity trustee page on the Charity Commission website contains detailed information, including excellent downloadable guides for potential trustees and information about finding trustees.

Broadly, trustees should:

  • fulfil any requirements in, and be appointed in accordance with, your governing document;
  • between them bring the skills, knowledge and expertise required to manage your charity;
  • reflect the needs and experience of the people that the charity serves, particularly in diversity and background;
  • fulfil any legal requirements (eg, CRB enhanced disclosures for trustees of charities working with children or young people) and good practice (eg, conflicts of interest, age, disqualification);
  • be adequately inducted and trained - downloadable packs are available from the Charity Commission;
  • communicate and liaise with those whom the charity exists to serve and with key partners.

The model governing documents include some requirements and stipulations about the appointment of trustees, and you may wish to add others – for instance, for an ecumenical project a clause could be inserted to ensure that there is a balance of trustees from the different supporting denominations.

It may also be a good idea where appropriate to include trustees from within the work itself.

Important note: If your organisation will be working with children, young people or vulnerable adults, every trustee must obtain a DBS enhanced disclosure before being appointed. More details at the Disclosure and Barring Service.

Public benefit

As part of the application process you will be required to prove that your charity exists for the public benefit:

  • There must be an identifiable benefit or benefits;
  • benefit must be to the public or a section of the public.

Again, the Charity Commission provide detailed guidance on demonstrating public benefit at Charitable purposes and Public Benefit.

Using well-known charitable objects and/or an approved governing document also helps demonstrate public benefit.

Registering

Once you have set up your charity, you need to register it charity online using the 'Apply to the commission' link on the CC21b - how to register your charity page of the Charity Commission website. The process is fairly self-explanatory. You can save your application and return to it at any point before finally submitting.


Finances

Cash in handCharity law states that all funds must be held in bank accounts in the name of the charity. The application form asks for the account details of the organisation's accounts.

One common hurdle is that most banks require a registered charity number before allowing you to open a charity bank account – but you cannot register a charity without the bank account details!

Some banks are better at dealing with this than others; amongst the best is CAF Bank (owned by the Charities Aid Foundation) - see their Banking for charities page.

CAF will issue you with provisional account details to use on the charity registration, before activating the account(s) on receipt of the charity registration number. They also provide competitive interest rates and are skilled in dealing with the particular requirements of charities.

Gift Aid

Gift Aid allows charities to claim back the tax paid by a donor on a donation to the charity. Donors must have signed a Gift Aid declaration for the charity and full details can be found at Gift Aid: the basics on the HMRC website.


Employing somebody

If you are going to employ somebody you will need to register with HMRC as an employer for tax purposes. The Employers page on the HMRC website includes comprehensive details and guidelines, including the 'new employer pack'.