An Introduction to Legal Structures for 'Not-for-Profit' Organisations Business Information Factsheet BIF349 August 2015 (Amended December 2016 ) Introduction The term 'not-for-profit organisation' (NFPO) is widely used to refer to a variety of types of organisation that have a community focus, however 'not-for-profit' has no legal meaning and it is not a formal legal structure. Organisations that have a community focus include different types of voluntary organisations and community groups. Social enterprises, which are commercial ventures with social aims are also NFPOs, although the term social enterprise has no legal meaning and it is also not a formal legal structure. Other types of organisation with a community focus include charities and cooperatives. The term not-for-profit is also misleading because all organisations must make a surplus or at least cover their costs in order to survive. However, with some exceptions, NFPOs typically re-invest all their profits in their organisation to fund their continuing activities rather than distributing them to the owners or shareholders, hence are considered to be 'not-for-profit'. NFPOs of whatever type need a formal legal structure in order to operate and there are various types of structure available. Some structures are particularly suitable for, or are typically used by, certain types of organisation as they provide the best fit with their aims and objectives. This factsheet briefly explains the available legal structures for NFPOs and provides examples of the types of NFPO that commonly use each structure. It also explains some of the management and financial requirements to be complied with, briefly explains the meaning of charitable status and CASC status and provides sources of further information and support. Legal structures for not-for-profit organisations Traditionally most NFPOs were either incorporated as companies or run as unincorporated associations or trusts. However, there are various legal structures that NFPOs can choose and professional advice should be taken before setting up to ensure that the most appropriate format is selected. Legal structures for NFPOs include: Unincorporated organisations Unincorporated organisations do not have a separate legal identity from their members and so the people who run them are not protected from liability for debts incurred by the organisation. NFPOs can choose to set up under one of the following unincorporated legal structures: An unincorporated association, which usually has a constitution that sets out its aims and objectives and which is run by a committee. As an unincorporated association is only a BIF349 Legal Structures for 'Not-for-Profit' Organisations - An Introduction to Page 1 of 6
collection of individuals, it cannot start legal action, borrow money or enter into contracts in its own name, or hold property without appointing trustees to do so on its behalf. There are no formal registration requirements for setting up an unincorporated association, which can also apply for charitable status. Typical examples of unincorporated associations include playgroups providing childcare or social clubs and membership associations linked to hobbies and interests. A Trust, which is an unincorporated body that has no separate legal identity but which is managed by trustees who are personally liable for the debts of the trust. The social objectives of a trust are protected in a trust deed, which also establishes the trust's rules of governance. Trustees cannot benefit from the trust but must act on behalf of the community, however they can own assets and property on behalf of the trust. Typical examples of trusts include those set up to manage village halls or to run community arts organisations. Incorporated organisations Incorporated organisations are legal entities in their own right and provide limited personal liability for their members or shareholders for any debts that the organisation may incur. In general NFPOs can choose to incorporate by using the following legal structures: A private company limited by guarantee, which under the Companies Act 2006 cannot have any share capital and therefore cannot have any shareholders, is controlled by 'members' through general meetings. The members, known as 'guarantors', agree to pay a specific amount of money (usually a nominal amount), towards the company's debts, which only become due if the company is wound up. Directors, who may or may not also be guarantors, are appointed as officers to manage the company, and are sometimes referred to as the 'Management Committee'. Companies limited by guarantee can and do make profits but cannot share these out with their members, and instead re-invest any surplus in the company or use the profits to promote or pursue the company's social objectives. This structure is commonly used by many NFPOs, for example business support organisations and enterprise agencies. A Community Interest Company, which is a special type of limited company legal structure for non-charitable social enterprises. CICs are limited companies and in many ways are exactly the same as 'ordinary' limited companies. This is because they trade commercially, are subject to the Companies Act 2006, and must be registered with the Registrar of Companies at Companies House as either a private company limited by shares, a private company limited by guarantee or a Public Limited Company (PLC). These are the same forms of limited company legal structure that the proprietors of ordinary companies must use when starting up. However, CICs differ from ordinary companies because they have clear social objectives and they are set up to trade and provide tangible benefits for their target communities. CICs are subject to certain statutory requirements and restrictions. They are regulated by the CIC Regulator, an independent public official, and before registration CICs must pass a 'Community Interest Test' before being approved by the CIC Regulator to ensure that the CICs activities will genuinely benefit the community. CICs are also subject to an 'asset lock' which is designed to ensure the assets of the CIC remain in the CIC or else are used for community benefit. Examples of CICs include BIF349 Legal Structures for 'Not-for-Profit' Organisations - An Introduction to Page 2 of 6
organisations that provide community transport or sell goods and services that benefit local communities while also providing worthwhile employment or training opportunities for people who are disadvantaged or disabled. A CIC cannot also have charitable status but can cease to trade as a CIC and then be converted into a charity. A Registered Society which is a type of mutual society that is a corporate entity but which has rules of association similar to an unincorporated association. Its members benefit from limited liability although it is not subject to the Companies Act 2006 but is regulated by the Financial Conduct Authority (FCA) under the Co-operative and Community Benefit Societies' Act 2014. There are two types of Registered Societies that are typically used by NFPOs: A Co-operative society, which is a democratic organisation based on the principle of one member, one vote - irrespective of how many shares they hold. Co-operatives are run for the mutual benefit of members and surplus profits are re-invested in the organisation. Examples of co-operatives include credit unions, which involve members pooling resources to provide their colleagues with low-cost loans and facilities for saving and borrowing, and retailers such as the 'Co-op'. A society run for the benefit of the community, which must show how its activities will benefit the whole community and not just its members. Such societies are run by their members and can raise funds by issuing shares to the public but must submit annual accounts to the FCA. There are special rules regarding how surplus funds can be used and how any assets remaining after the society is dissolved should be distributed. This type of society must be able to show why it should not simply be registered as a company under the Companies Act 2006. For example a nursery school could be run as a society for the benefit of the community. Of the two types of IPS, only a society run for the benefit of the community can apply for charitable status. Other statuses used by NFPOs NFPOs can also adopt specific statuses, which, although they are not legal structures, typically enable them to benefit from certain tax advantages. Examples of well-known statuses used by NFPOs include charitable status and CASC status. Charitable status Charity is a status, not a legal structure, and charities are specific types of voluntary and NFPOs that operate for the public benefit. Charities must comply with specific requirements stipulated by charity law, and definitions of charities, charitable tests, registration requirements and charity laws vary slightly between England, Wales, Scotland and Northern Ireland. Charitable status provides certain benefits for organisations, principally relating to tax advantages and various organisations with different types of legal structure can operate as charities, including for example unincorporated associations, which can set up as an unincorporated charitable association; trusts, which can set up as charitable trusts; and companies limited by guarantee, which can set up as charitable companies. BIF349 Legal Structures for 'Not-for-Profit' Organisations - An Introduction to Page 3 of 6
To operate as a charity, organisations in England, Wales, Scotland and Northern Ireland must register with the relevant regulatory body. In England and Wales this is the Charity Commission (www.gov.uk/government/organisations/charity-commission) and in Scotland this is the Office of the Scottish Charity Regulator (OSCR, www.oscr.org.uk), while in Northern Ireland, charities must register with the Charity Commission for Northern Ireland (www.charitycommissionni.org.uk). The Charities Act 2006 introduced a new form of incorporation, the Charitable Incorporated Organisation (CIO), which is a structure intended specifically for charities that do not want or need the complication of becoming a company limited by guarantee. CIO status provides the advantage of limited liability but has less onerous accounting, reporting, filing and governance requirements than other charitable statuses. Go to www.gov.uk/charity-types-how-to-choose-a-structure for more information about charitable structures. A wide variety of organisations have charitable status, including those set up to raise money for medical research, hospices, private schools and nurseries, and organisations set up to provide employment opportunities for people with disabilities. Although a CIC cannot have charitable status, a charity can set up a separate CIC to act as its trading arm. CASC status A Community Amateur Sports Club (CASC) such as a rugby, fishing, athletics or horse riding club can apply to HM Revenue & Customs (HMRC) to be registered as a CASC, which provides certain tax advantages, although CASC status is not in itself a legal structure, CASCs can be set up as either unincorporated or incorporated organisations. Benefits of CASC registration include certain exemptions from corporation tax, gift aid on donations and mandatory business rate relief. Go to www.cascinfo.co.uk for more information and see BIF 501, An Introduction to Community Amateur Sports Clubs (CASCs). Financial and management issues Almost all NFPOs are subject to or 'liable for' corporation tax (with one or two exceptions) and must register with HMRC for corporation tax when setting up. However, certain types of NFPO are exempt from actually paying corporation tax depending on their particular circumstances, and charities have the right not to pay tax on any income, gains or profits from certain activities. Other NFPOs may also be able to negotiate a tax exemption but this is not automatic and depends largely on their sources of income. Go to www.gov.uk/charities-and-tax for more information about charities and tax. Many NFPOs are eligible to apply for grant aid and other financial support to cover their costs or enable them to develop new activities. Grant aid is available from a variety of sources such as grant-giving charitable foundations and publicly-funded initiatives. Business advisers, reference libraries, business support organisations and enterprise agencies can provide information and advice about sources of finance for NFPOs. For details of other support initiatives for NFPOs and social enterprises, including support available on a regional level, see BIF 442, A Guide to Support for Social Enterprise. BIF349 Legal Structures for 'Not-for-Profit' Organisations - An Introduction to Page 4 of 6
Hints and tips Professional advice should be sought when deciding which legal structure to choose. The Directory of Social Change (www.dsc.org.uk) provides information about courses and conferences aimed at the voluntary sector and community organisations. The Charities Aid Foundation (www.cafonline.org) helps not-for-profit organisations to make the most of their resources by providing advice and consultancy services. It can also provide small grants. Further information BIF 15 An Introduction to Tax, National Insurance and VAT BIF 32 Choosing the Right Business Legal Structure BIF 33 Applying for Authorisation as a Financial Services Provider BIF 66 Setting up in Business as a Co-operative BIF 442 A Guide to Support for Social Enterprise BIF 445 A Guide to Setting up a Community Interest Company (CIC) BIF 469 Setting up and Registering as a Charity BIF 501 An Introduction to Community Amateur Sports Clubs (CASCs) BIF 526 A Guide to Setting up a Company Limited by Guarantee Useful contacts The Charity Commission is the statutory organisation that regulates charities in England and Wales. Website: www.gov.uk/government/organisations/charity-commission The Office of the Scottish Charity Regulator (OSCR) is the statutory organisation that regulates charities in Scotland. Tel: (01382) 220446 Website: www.oscr.org.uk The Charity Commission for Northern Ireland is responsible for overseeing charity administration in Northern Ireland. Tel: (028) 3832 0220 Website: www.charitycommissionni.org.uk The Financial Conduct Authority (FCA) can be contacted for information on the legislation governing credit unions. Tel: 0300 500 0597 Website: www.fca.org.uk Companies House provides registration and filing services, as well as useful leaflets and information. Tel: 0303 123 4500 Website: www.gov.uk/government/organisations/companies-house Social Enterprise UK offers news, information and resources for not-for-profit organisations. Tel: (020) 3589 4950 Website: www.socialenterprise.org.uk BIF349 Legal Structures for 'Not-for-Profit' Organisations - An Introduction to Page 5 of 6
The Charities Aid Foundation (CAF) provides services to facilitate tax-efficient giving, and offers covenant administration services. It carries out research and publishes information about voluntary sector funding. Tel: 0300 012 3000 Website: www.cafonline.org The Community Action Network (CAN) is a learning and support network for social entrepreneurs. Members can share information about events, research and grants, as well as useful contacts and advice. Tel: (020) 3096 7600 Website: www.can-online.org.uk The School for Social Entrepreneurs (SSE) works with local organisations around the UK to establish networks of local social entrepreneur programmes. Tel: (020) 7089 9120 Website: www.the-sse.org The National Council for Voluntary Organisations (NCVO) is an umbrella organisation for voluntary groups in England. It has associated organisations in Scotland, Wales and Northern Ireland. Tel: (020) 7713 6161 Website: www.ncvo.org.uk Scottish Council for Voluntary Organisations (SCVO) Website: www.scvo.org.uk Welsh Council for Voluntary Action (WCVA) Website: www.wcva.org.uk Northern Ireland Council for Voluntary Action (NICVA) Website: www.nicva.org DISCLAIMER While all reasonable efforts have been made, the publisher makes no warranties that this information is accurate and up-to-date and will not be responsible for any errors or omissions in the information nor any consequences of any errors or omissions. Professional advice should be sought where appropriate. Cobweb Information Ltd, Unit 9 Bankside, The Watermark, Gateshead, NE11 9SY. Tel: 0191 461 8000 Website: www.cobwebinfo.com BIF349 Legal Structures for 'Not-for-Profit' Organisations - An Introduction to Page 6 of 6