The pros and cons of being a charity

Many charitable causes start off being organised and run by a small informal group, such as within a family or community, with no formal structure. However, as things grow, or there is a desire to apply for public grants or other funding, a more formal vehicle for the good cause may need to be considered.

There are lots of things to think about when setting up a new entity. One of the first things to consider is the type of entity that you will be set up as. This could be a limited company, a limited liability partnership, a community interest company or a charity, to name a few. Each type has different benefits. We have considered below the pros and cons of setting up as a charity.

Pros

• Charities do not generally have to pay income/corporation tax (in the case of some types of income), capital gains tax, or stamp duty. Furthermore, gifts to charities are usually free of inheritance tax.

• A charity pays no more than 20% of normal business rates on the buildings which they use and occupy to further their charitable purposes. In many cases the local authority will award, upon application, the additional 20% as further relief, giving 100% rates relief.

• A charity can get special VAT treatment in some circumstances. Many think charities are exempt from VAT, but this is not always the case.

• Charities are often able to raise funds from the public, grant-making trusts and local government more easily than non-charitable bodies.

• Charities can reclaim gift aid on many of the donations received from private individuals.

• Charities are able to give the public the assurance that they are monitored and advised by The Charity Commission.

• Charities benefit from public recognition and trust; they are often recognised for the social benefit they provide.

Cons

• An organisation must have exclusively charitable purposes. Some organisations may carry out a range of activities, where only some of them are charitable activities. In general, to meet the charity test and register as a charity, the organisation would have to stop its non-charitable activities. This is subject to certain types of charitable trading which are allowed. The non-charitable activities can continue if carried on by a separate non-charitable organisation, which can in turn gift aid any profits it makes to the organisation.

• There are strict rules that apply to trade by charities. The Charity Commission’s guidelines for Charities and Trading (CC35) offer further guidance.

• Charity law imposes certain financial reporting obligations; these vary with the size of the charity.

• If incorporated as a company limited by guarantee, the organisation will deal with two Regulators – Charity Commission and Companies House.

• Trustees on the board cannot be paid unless the constitution of a charity and the Charity Commission authorise it.

• Trustees need to avoid any situation where charitable and personal interests conflict.

If you are thinking about setting up a charity, please get in touch with a member of our Not For Profit team.

A version of this blog originally appeared on the website of PrimeGlobal member firm, Henderson Loggie.