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 as long as it relates to their charitable activity. 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, due to the their trusted, charitable status.

• Charities can reclaim gift aid on many of the donations received from private individuals, giving them a very valuable 25% extra on top of these donations.

• 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 (often a subsidiary of the charity), 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.

• Charities are subject to a heavier burden of scrutiny of their accounts, requiring an audit at a much lower threshold than that for most commercial organisations.

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