“No one has ever become poor by giving.”

Anne Frank

Charities benefit society and people all over the world, and many SMEs are setting up their own charities and foundations for this purpose. Not only does taking such a step benefit staff morale, but social responsibility can also boost a company’s standing and lead to greater exposure and new customers.

However, as many have discovered, setting up a charity requires a lot more than just good intentions. There are a myriad of rules and regulations which must be understood to ensure your philanthropic venture is legally compliant.

What is a charity?

A charity is an institution established for charitable purposes only, for instance the prevention or relief of poverty, the advancement health and saving lives or the advancement of community development. There are obvious examples such as Oxfam, Save the Children and the Wellcome Trust; however, most independent schools are set up as charities as is Wikipedia (operated through the Wikimedia Foundation).

How is a charity set up?

There are six steps involved in setting up a charity.

  1. Making sure a charity structure is the right option for your venture – although charities offer many advantages, they can also be restrictive. For example, trustees are normally not paid for their time and strict rules are applied to any trading activities undertaken. Setting up a named fund or collaborating with an existing charity could be an alternative option;
  2. Deciding on your charity’s purpose – to form a successful charity, you need to be clear on its goals and objectives. Your charity can have more than one purpose, but it cannot have a purpose which is not charitable. A charity’s purpose is usually set out in the ‘objects clause’ of its governing document.;
  3. Choosing a charity structure – there are four main types of charity structures in the UK: a Charitable Incorporated Organisation, a charitable company limited by guarantee, an unincorporated association, and a trust. A solicitor can assist you with choosing the right structure to fit with your charity’s objectives;
  4. Drafting the governing document – this is a legal document which sets out your charity’s purpose and how it is to run;
  5. Naming your charity – this must then be registered with the Charities Commission. If the name is misleading or already taken by another charity, you may be asked to change it. Certain names require the approval of Charity Commission, before being registered with Companies House; and
  6. Finding trustees – charity trustees sit on the board of a charity and make decisions on how it is run. They need to exercise the same amount of diligence as is required when handling a business. That means making sure the charity is solvent, well-managed and meets the needs for which it is set up.

How do I register?

You must apply to register with the Charities Commission once it is set up. To summarise, at this stage, you should have:

  • Decided what your charity’s purpose is;
  • Decided on the charity structure;
  • Written the governing document;
  • Chosen a name;
  • Recruited trustees; and
  • Decided how the charity will be funded.

The Charity Commission will then process your application (a process which could take around 6 weeks) and make one of the following decisions:

  • register your institution as a charity. Your charity will appear in the public register 48 hours thereafter;
  • register your institution as a charity on the condition that the trustees take certain actions. The Charity Commission will follow up on said actions to ensure they are complied with;
  • reject your application on the grounds that your institution isn’t set up as a charity; or
  • contact you to provide more information or clarification before making a final decision.

What are some of the financial advantages?

  • Tax – most charities do not have to pay income/corporation tax (for some income, not all), capital gains tax and most gifts to charities do not incur inheritance tax. NB: do not forget to register with HMRC for tax relief and to seek the advice of an accountant on the above;
  • Some charities receive special VAT treatment (however, contrary to popular belief, they are not exempt from VAT);
  • Gift aid can be reclaimed on donations from individuals; and
  • Buildings which are used for the purposes of the charities pay no more than 20% of the normal business rate, and councils will sometimes reduce this even further.

Additional points to consider

  • Charities are strictly regulated by the Charities Commission, and their rules and regulations must be complied with;
  • In most cases, trustees are forbidden to financially benefit from the charity and must avoid conflicts of interest;
  • Political campaigning by the charity is limited; and
  • The business of the charity must always be undertaken in respect of the purpose(s) for which it is set up.

In summary

Many SMEs find the process of setting up a charity hugely rewarding for everyone involved. With the right legal advice, you can give back to the community, raise the profile of your business, all the while ensuring that you are in compliance with the applicable rules and regulations.

Saracens Solicitors is a multi-service law firm based in London’s West End. We have dedicated and highly experienced charity law solicitors who can advise on all legal matters relating to the charity sector. For more information, please call our office on 020 3588 3500.

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