What Are The 4 Different Ways To Set Up A Charity?
Have you ever thought about setting up a charity but are unsure which set-up would be right for you? This post will outline the four different types of set-up that a charity can have.
Why is it important to get it right? If you change your mind further down the line, you will need to submit a new application to the Charity Commission for formal registration.
How do I know which one is right for me? The set-up you choose will be based on the intended activities of the charity and the resources available.
So let’s look at the different set-ups you can have and what they would mean for you.
1. Charitable company limited by guarantee
This set-up combines the formal structure of a limited company with the work of a charity. Charities set up in this way can benefit from having limited liability and are governed by articles of association.
Why is limited liability important? It can afford the members and trustees a level of protection when running the charity.
The charity will have its own legal identity and will therefore be able to enter into contracts and hold property in its own name.
Are there any downfalls of this set-up? Like any other limited company, the charity must comply with the directors' duties, as set out in the Companies Act 2006. As well as this, the charity will need to submit their filings to both Companies House and the Charity Commission.
What’s the difference between a company limited by shares and a company limited by guarantee? A charitable company can’t distribute any surpluses to its members or shareholders, and it must operate in the charity's best interests.
This is a simple set-up compared to the others and is a way for a group of people to manage assets such as money, investments, land or buildings.
The trust will be governed by a trust deed, rather than a statutory framework, meaning it can be more flexible. However, it does mean that the trust is not a legal entity in its own right and, therefore, cannot enter into any contracts in its own name.
Because the trust cannot enter into contracts, there are better set-ups when needing to employ others.
Can the trustees enter into a contract? They can; however, it will have to be done in a personal capacity, which can open them up to personal liability.
3. Charitable unincorporated association
This is also a straightforward set-up for charities; however, it is best used when the charity is relatively small in terms of assets.
While there is a constitution that will need to be abided by, it is not prescribed. Just be aware that there will be prohibitions in place on the distribution of funds to members.
Is there limited liability for members? There is no limited liability, so the members will have to enter into any contracts or agreements personally.
4. Charitable Incorporated Organisation (CIO)
This set-up is specifically designed for charities.
Charities are incorporated and regulated by the Charity Commission, which avoids the need for duplicate filings with Companies House.
The charity will be governed by a constitution prescribed by the Charity Commission and therefore is not as flexible as the one used in unincorporated associations.
Is there limited liability for members? Yes, a CIO has its own legal identity.
Which one is right for me?
It really depends on the purpose of your charity and how you want to be able to run it. But if you consider all of the above, it should become clear which one you should use. However, you should always seek professional advice before making any final decisions.
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