Many people identify causes which they are personally involved in or believe are worth supporting. The support is often by way of raising money for the cause through sponsoring an event. However, for those who want to establish an organisation to make a greater difference in pursuit of a cause, the first question is – How do we go about it?
The first thought is to set up a Charity.
This requires several steps, the primary one being Public Benefit. An application has to be made to the Scottish Charity Regulator (OSCR) to demonstrate that the cause can be classified as meeting the criteria for a Registered Charity.
There are several types of charities – Trusts, Unincorporated Charities, SCIOs (Scottish Charitable Incorporated Organisations) Each format requires a constitution drawn up by a solicitor. SCIO which is a legal form unique to Scottish charities provides a high degree of legal protection against liability, unlike an unincorporated charity where trustees could be personally responsible for debts.
A SCIO is regulated by OSCR rather than by Companies House. A specific format of accounts for charities is required for OSCR.
The second thought is that the organisation could be set up as a Limited Company by Guarantee. This would be regulated by Companies House through the normal application for setting up a commercial company. Limited by Guarantee means that there no shareholders and the maximum liability for directors of the company would be £1.
The company would not be a charity and therefore not subject to the rules of the Charities Act and OSCR regulations. However, the company may not be able to apply for funding from trusts and other sources that specify charitable status.
Community Interest Companies
A third type of organisation called a CIC (Community Interest Company) may be suitable for the cause. It is a type of company introduced by the Government under the Companies Act 2004, designed for social enterprises that want to use their profits and assets for the public good.
CICs are more lightly regulated than charities but do not have the benefit of charitable status, A CIC cannot also be a charity but could be a subsidiary of a charity to generate profits for the good clause.
Unlike a charity, profits of a CIC are subject to Corporation Tax. However, it can issue shares and shareholders can receive dividends provided they do not exceed 20 per cent of the value of their shares in any one year. The CIC Regulator imposes an Asset Lock on the CIC restricting sale or transfer to a third party to ensure that assets and profits are used for the community benefit.
Not-For-Profit Social Enterprises
The fourth type of structure for not-for-profit social enterprises is to form a Society which issues Community Shares as an ideal way for communities to invest in enterprises serving a community purpose.
Societies need to have at least £10,000 in share capital and at least 20 members, to focus on genuinely community-owned ventures.
Shareholders have the right to withdraw their share capital, subject to the terms and conditions stated in the society’s rules and share offer document.
Regulation is carried out by the Financial Conduct Authority (FCA) within society law and community shares cannot be sold or transferred or liquidated as a business in order to achieve a capital gain.
In conclusion, there are several different legal structures for your non-profit organisation in the UK – each with differing responsibilities in relation to the Chairities Act, stakeholders and the tax man. As a Chartered Accountant who has worked with not-for-profit organisations for over 20 years, I’d be more than happy to advise you on which structure will suit the needs of your organisation the best.