Charities and related third-sector organisations play a vital role in our society. Led by altruistic and passionate individuals, they understand and recognise the need where it is greatest and give a voice to those who previously had none.
However, the role of these organisations has become ever more difficult to fulfil as recession-led welfare cuts mean demands have risen as funds have decreased.
This disharmony now requires the third sector to govern, manage and fund organisations in the most efficient and effective way possible as well as continuing to fulfil strict legal obligations.
This legal guide on how to start a charity will give you all the information you need so you can fulfil your mission knowing your organisation is protected.
Quickly jump to a section:
- Definition of a charity
- An introduction to charity law
- How to choose a charity structure
- Charity types
- Third sector organisations
- Setting up a charity
- Intellectual property for charities
- Logos and design work
- Create a charity website
- Data protection for voluntary organisations
Definition of a charity
A charity is an organisation that is established for exclusively charitable purposes which are defined by law, such as preventing poverty or relieving sickness or advancing education or sport or arts, culture or science (to name a few).
Charities’ purposes must be able to benefit the public and charity trustees must run their charities for the benefit of the public. Charities cannot distribute their profits to shareholders: all funding raised by or for a charity must go towards the cause.
Charities in England and Wales are governed principally by the Charities Act 2011. Section 1 of the Charities Act states that charities are institutions which:
- Are established for charitable purposes only
- Fall under the control of the High Court in the exercise of its jurisdiction with respect to charities
An introduction to charity law
Charity law includes requirements about registering your charity with the Charity Commission (the regulator of charities in England and Wales) and ongoing reporting requirements, such as keeping your charity’s details (name, contact details, governing document, trustees’ details) up to date and filing annual returns, reports and accounts.
This is public information and it is the responsibility of the trustees to make clear how their charity is fulfilling the charitable purposes for which it has been registered.
You can check the government’s annual return guidance to find requirements for your charity. Charity law also governs, for example, how charities may use their money and other assets for their charitable purposes, how charities can make changes to what they do and how they do it, how they can merge with other charities or wind up, and the legal duties of charity trustees.
There will be other laws and requirements that apply to your charity as well, depending on what it does, its structure and where it works, whether in the UK or worldwide. Charities are also subject to general laws like tax, data protection and health and safety, with which trustees are responsible for complying.
LawBite has friendly and highly qualified lawyers who are experts in forming charities and registering them with the Charity Commission, as well as explaining all you need to know about charity law and governance, plus specialist areas like fundraising and trading.
Charities must have an awareness of charity law and governance to make sure they are legally compliant and following good practices.
In addition to following the requirements of your charity’s governing document, all charities must comply with relevant law and guidance, including:
- The Charities Act 2011
- The Charities Act 1992
- The Charities (Protection and Social Investment) Act 2016
- The Finance Act 2010
- Charity Commission guidance which highlights what charities ‘must’ do, i.e. what they are legally required to do, and what they ‘should do’ i.e. what they are expected to follow and apply to their charity
- The Statement of Recommended Practice (SORP) for charity accounting. This contains recommendations and requirements about the preparation of compliant accounts
Depending on your charity’s structure, you may also have to comply with, for example, the Companies Act 2006, the Trustee Act 2000 or the Charitable Incorporated Organisations (General) Regulations 2012 and the Charitable Incorporated Organisations (Insolvency and Dissolution) Regulations 2012.
How to choose a charity structure
Everyone has heard of ‘charities’ but what is the best kind of charity for your situation and is your cause even suited to a ‘charity’ status? In some cases, it might be best served under a different ‘third-sector’ banner.
Here we will outline the different types of charity structures and what you should consider about for each one, as each legal status will demand different legal obligations.
Choosing the right legal status for your charity from the outset can save the charity money, help to protect the charity’s trustees, and make more funding sources available.
This is because the structure will directly affect how your charity will operate in practice in these three key ways:
- Who will run the charity and whether it will be open to a wider membership
- Whether the charity’s ‘trustees’ (see below for a more detailed description of what these are) will be personally liable for what the charity does and its losses
- Whether the charity can enter into contracts, own property or employ staff in its own name like a ‘company’ can
Before we tackle the structures, if we are going to talk about charities it would be good to explain what a ‘trustee’ is as it is a term that gets used a lot.
A trustee is someone who takes legal responsibility for the charity. Whether they are called ‘directors’, ‘governors’, or ‘committee members’ on a day to day basis, a trustee is simply someone who takes decisions and is in control of the management of the charity.
Often, there is more than one trustee and decisions are made collectively at trustee board meetings. One trustee does not usually have the authority to act alone unless that authority has been collectively given to him or her.
Find out more about the role of a charity trustee
Charity types
1. The Charitable Trust (‘Trust’)
This is the simplest form of charity. A charitable trust has a group of trustees who manage the charity’s assets in accordance with a trust deed. The key point to note is that a trust does not have a legal identity in its own right, so it is the trustees who are personally responsible if the charity is unable to pay its debts.
2. The Charitable Unincorporated Association
The charitable unincorporated association is similar to a trust, but in addition to the trustees, the unincorporated association has a group of members who have a say in the running of the charity. It may have a constitution or governing document. Like a trust, a charitable unincorporated association is not a legal entity in its own right, so the trustees are at risk if the charity gets into difficulty.
3. The Charitable Company Limited by Guarantee
In most cases, the charitable company limited by guarantee will be one of the most sensible options for a new charity, and it is a structure that is common and well understood. Crucially, the charitable company has a legal identity in its own right, which means that the trustees are generally protected from personal liability.
In addition to its trustees, the charitable company has a group of members who have a say in the running of the charity. The membership may be very small (perhaps only the trustees), or it may be much wider.
A charitable company is regulated by Companies House as well as by the Charity Commission, which means a bit of additional administration and expense. The charitable company itself can enter into contracts, own property and employ people.
4. The Charitable Incorporated Organisation (CIO)
This is a new structure designed specifically for charities. Like a charitable company, the CIO has its own legal identity, so the trustees are protected from personal liability. Again, the CIO has a group of trustees and a membership.
There are 2 types of CIO:
- The Association CIO with trustees and a membership distinct from the trustees
- A Foundation CIO where the trustees and membership are the same people
The key difference from the charitable company is that the CIO is regulated solely by the Charity Commission.
There are many pros and cons when comparing the CIO to a charitable company. Advantages of the CIO include the fact that it only has one regulator, is not subject to company law, has simpler accounting requirements for smaller charities, and has charitable status even if the charity’s income is less than £5,000.
Disadvantages include the fact that the structure is relatively unknown and has not been tried and tested, that greater involvement of the Charity Commission could lead to delays, and that CIOs could face serious difficulties when trying to use their assets as security for borrowing.
So which one?
The first two of these entities (charitable trust and charitable unincorporated association), you should think of as being the most simple yet having the most liability as they are not separate legal identities as you would have with a company (corporate) structure.
The main difference between them is that the charitable trust is not open to a ‘wider membership’, whereas the unincorporated association is.
A ‘wider membership’ is a charity that has members who aren’t trustees who decide and vote on important decisions, at an AGM for example.
The second two options (a charitable company limited by guarantee and a charitable incorporated organisation) are corporate bodies and are therefore legal entities in their own right. This means trustees are generally not personally liable for what happens, which includes any losses.
Remember, either of these two legal company structures is not like that of a regular commercial company, which means it cannot distribute profits to its members (as you would have in a standard company/shareholder relationship), it must be registered with the Charity Commission and in the case of a company limited by guarantee, by Companies House and abide by their rules.
All assets it accumulates must be used to carry out its charitable purpose and overall it must operate in the best interests of the charity. Again, you can choose to either open the entity up to a ‘wider membership’ or not.
Third sector organisations
1. The Community Interest Company (CIC)
The CIC is not a structure that is available for charities but is often a structure that founders of charities consider at the outset as it was set up to provide a structure for non-charitable social enterprises. CICs are companies that are set up for the benefit of the community.
Like charities, they are restricted in the way in which they may use their assets, but they can be set up for a wider range of purposes than charities.
Unlike charities, CICs have the potential to issue shares to raise capital and may pay limited dividends to their shareholders and limited salaries to their governing body members. They do not however have the considerable tax advantages that charities have, and many funding opportunities will not be available to them.
A CIC does benefit from limited liability. A CIC is regulated by the Community Interest Company Regulator.
Aside from CICs which do not operate under the banner of ‘charity’, there are a few other types of community organisations that can be value-driven and therefore might be better suited to your needs. For example, you could set up as a ‘co-operative’ or even a (non-charitable) limited company.
2. Social enterprises
A social enterprise is not a form of legal structure, it is a broader term used to refer to organisations (charitable or non-charitable) that are set up for social or community purposes and which operate in a commercial way.
A social enterprise may choose from a variety of legal forms, with the CIC being a popular choice.
3. Foundations
Again, in the UK a foundation is not a form of legal structure. (It should not be confused with an NHS Foundation Trust which is governed by specific rules).
A charitable foundation commonly supports other charities or organisations by giving donations, but like other charities may take a variety of legal forms.
4. Not-for-profit organisations
This is an organisation (charitable or non-charitable) that is set up on the basis that any profits are used for its specified purposes rather than being shared between its members. A not-for-profit organisation may take a variety of legal forms.
5. Community Amateur Sports Club (CASC)
CASCS are organisations registered with HMRC and may be incorporated or unincorporated and benefit from a range of tax reliefs.
However once registered as a CASC, they cannot be registered as a charity. Sports clubs may, subject to certain conditions, be registered as a charity or transfer their assets and activities to a new charity if they no longer want to be a CASC and would be eligible to be a sports charity.
Setting up a charity
If you decide setting up a charity is the right option for you, and you have decided on your structure, there are 6 key steps you will take:
1. The first action point would be to make sure your prospective charity has charitable purposes for the ‘public benefit’.
For example, a few from the government list would be ‘relieving poverty’ and ‘animal welfare’. You certainly could not set up a charity whose purpose is to fund the purchase of your new Xbox (jokes aside, you can’t set one up for an individual, even if they are in need).
2. Secondly, you should find ‘trustees’ for your charity. As explained, a trustee is someone who takes legal responsibility for the running of the charity and as such, they are very important.
The Charity Commission has a good guide on the best practices for recruiting one- (you usually need at least 3). They generally must be 18 and cannot have previously been disqualified as a trustee or company director, have certain unspent criminal convictions or be undischarged bankrupt (still going through the process of bankruptcy).
3. If they are working with children or vulnerable adults, they will need to be DBS (Disclosure and Barring Service) checked.
There are several other important factors and skills you should keep in mind too to ensure you select the right person.
4. You’ll also want to choose a name for your charity. Similar rules apply as they do for any kind of traditional company.
For example, the name can’t already be trademarked by someone else, it can’t be deemed offensive, misleading or be similar to the name of an existing registered charity or company. You can check the Charities Commission website to see a full list of naming guidelines and search the charity register to make sure you’re not duplicating.
5. You will need to decide on a structure for your charity taking into account who will run it.
Plus how wide the membership is and whether the trustees will be personally liable for what the charity does and its losses.
6. The next stage would be to create your ‘governing document’.
This is something every charity must have as it will define how your charity is run. Moreover, what kind of governing document you write will depend on what legal structure you choose for your charity.
This document will outline points such as who runs the charity, its charitable purpose, how trustees are appointed and rules about their expenses, payments to trustees and how to close the charity. To make registration easier (the next stage) you should use the appropriate Charity Commission model template for your chosen legal structure.
The point at which you write your ‘governing document’ is when you need to properly state your charitable purpose by putting it into words. Your charitable purpose must fall within any of the 13 descriptions of purposes - and be for the public benefit. The 4 points you should address in your description are:
- The outcome of your work
- Where the outcome will happen
- How you will achieve the outcome
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Who benefits
Complying with your governing document is a legal requirement as a trustee.
Tip: Keep your aims broad yet clear on what you want to achieve but less specific as to how you will achieve it to leave your organisation room for manoeuvre as it matures.
Finally, you must officially register as a charity with the Charity Commission (if you think your income will be over £5,000 per year or if you wish to set up as a CIO- see above).
Make sure to check out the government website to see what they’ll ask you so that you are prepared.
Please note: This section is written from the perspective of setting up an English/Welsh charity. There are slightly different rules for Scottish and Northern Irish charities and we would urge you to read the legal requirements for Scotland and Northern Ireland.
Intellectual property for charities
If you want to create a real name for yourself and become easily recognisable (think the British Red Cross logo) you’re going to have to do a ‘branding’ exercise and from a legal perspective think about your intellectual property (IP).
In short, your IP is the intangible property you acquire through creativity or ideas. Doing so will certainly help you to achieve your aims as it will help to foster trust in your organisation, to the ultimate gain of your beneficiaries.
There are 4 main types of IP you could acquire and (importantly) protect:
- Copyright: this protects written and artistic works, documents, software, sounds, films, etc, and, in some cases, databases
- Trademarks: think of logos and slogans here –Kit-Kat, Coca Cola, Nike’s ‘Just Do It’ slogan. These are to differentiate one organisation’s products and services from another. This protects one organisation ‘passing off’ its products or services as those of another in order to benefit from their more successful reputation.
- Design rights: these protect the appearance of products (their shape and configuration)
- Patents: used as protection for technical innovations
Logos and design work
One of the main initial parts of this ‘branding exercise’ is creating the look and feel of your charity or organisation. Unless you have fantastic design and branding skills (and the time to utilise them) you might want to hire a graphic designer or an agency to create a logo and any other marketing collateral e.g. a slogan for you.
If you do hire a designer or agency, make sure you have a contract in place which specifies precisely who owns the intellectual property in whatever they create, as well as stating a deadline for the project and the costs involved. A supply of services contract would be a good place to start. Make sure that within this contract, you ultimately ‘own’ the content created.
Free supply of services contract template
Again, bear in mind some images and phrases will not be able to be trademarked (an important step outlined below) so check the government’s IP website before making any final decisions.
Once you have these lovely branding creations in your grasp, you really should think about protecting them and this means registering a trademark. Having a trademark allows you to:
- Take appropriate legal action against people using your brand without prior consent
- Sell and license your brand
- Use the famous ® symbol next to images of your brand which will act as a deterrent for those wishing to use it without your knowledge
How much does it cost to register a trademark?
It costs £170 to register a trademark in one class, which refers to the type of product or service the trademark refers to. There are 45 different classes available in the UK. Each additional class you need costs £50. These are the ‘official’ government fees though you might be interested in paying for professional help as the forms are quite complicated to fill out.
Once you have registered your mark, nobody can use the same or similar mark for goods or services in that class or the same or similar mark for goods or services in another class where there is a risk of confusing the public.
Create a charity website
Whilst having a charitable organisation doesn’t mean you HAVE to have a website, most people do a bit of research before donating large sums, plus it is a great place to go into more depth about your cause or even trade to raise funds for your organisation.
If you can make your own website- great! But even if you can, you might not have the time so hiring someone to do it is your likely route.
As with anyone you engage with outside your company, for example, a freelancer or an agency, you absolutely must have a contract in place before they undertake work with you.
This will avoid any conflict over the cost and how it is to be paid, what is to be delivered and when. It will also deal with what is to happen if a problem arises – e.g. use of unauthorised software, correcting bugs, or a delay in delivery.
Once you have built your website, there are certain legal requirements you must abide by as well which should be stated explicitly on your website, usually in the footer of the page or in an ‘About’ section.
There are four main documents you should be aware of that cover these obligations, though not all will necessarily apply:
Terms and Conditions of Website Use (Ts and Cs)
This document gives details about you which you are legally required to provide (e.g. trading name, registered office, trading address, and VAT number), grants a licence to users to use your site subject to compliance with the T’s and C’s, sets out the limits of your responsibilities when people use your website, and clarifies that you own the website.
Free website terms and conditions template
Acceptable use policy
This document sets some rules for the users in the way that they are allowed to use your website – e.g. not introducing worms or viruses, not uploading illegal content, not breaching relevant laws, not breaching copyright.
Free acceptable use policy template
Privacy policy
You will need this if you are collecting personal data at any point, for example, if you wanted to send out a newsletter and you had to collect the user’s email address to receive it.
This will state what you collect, what you intend to do with the data, whether you are going to supply it to third parties (in which case consent is required), whether you consolidate it in anonymised aggregated data, how it is stored, how users can find out what information is held about them and object to its use etc.
Cookies
You will need this if you are utilising software that places a cookie on a user’s computer so that you can identify them when they return to your site.
A lot of websites will bundle these together in one or two documents, e.g. you will often find Website Terms and Conditions with the Acceptable Use Policy or the Cookies and Privacy Policy together.
Data protection for voluntary organisations
We get asked a lot about this, as it’s a particularly hot topic at the moment.
The Data Protection Act 1998 defines how information about living people may be legally processed and handled. Businesses are required to comply with eight data protection principles and failure to do so may result in regulatory action by the Information Commissioners Office (ICO).
The fundamental principles of data protection enshrined in the Act provide that personal data must:
- Be processed fairly and lawfully;
- Be obtained only for lawful purposes and not processed in any manner incompatible with those purposes;
- Be adequate, relevant and not excessive;
- Be accurate and where necessary, kept up to date;
- Not be retained for longer than necessary;
- Be processed in accordance with the rights and freedoms of data subjects under the Act;
- Be protected against unauthorised or unlawful processing and against accidental loss, destruction or damage; and
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Not be transferred to a country or territory outside the European Economic Area (EEA) unless that country or territory protects the rights and freedoms of data subjects
If these principles are complied with, personal data may be processed for core business purposes (i.e. staff administration/business marketing activities) without the need to notify the Information Commissioner. If data is processed for other purposes, the Information Commissioner must be notified.
Subject Access Requests
It should also be noted that individuals have a right under the Act to obtain a copy of the information held about them. This is not limited to employees. If a business receives such a ‘subject access request’, a response must be given promptly and no later than 40 days and this covers all data, whether it is held electronically, in paper form or in any other form.
Review of Data Protection
Charities should consider conducting a review of the personal data that they process. If sensitive personal data is processed, specialist advice may be needed and extra care taken where sensitive personal data (including details about race, political opinion, religious belief, trade union affiliation, physical or mental health, sexual life and the alleged commission of any offence) is concerned as conditions for processing such data are much more stringent than in relation to general personal data.
The ICO has developed an online self-assessment tool that can be used by small and medium-sized organisations (SMEs) to assess their compliance with the Data Protection Act and improve data handling procedures. The tool provides a rating of compliance with the Act based on responses to a questionnaire and includes links to relevant guidance and information.
General Data Protection Regulation (GDPR)
In light of the recent high-profile Information Commissioner's Office (ICO) decisions and a heightened awareness of data protection by the general public, all businesses including charities need to have a proper understanding of their obligations under the Data Protection Act when handling personal data.
Furthermore, with the UK General Data Protection Regulation (UK GDPR), an even more stringent data protection regime, increased financial penalties and a wider definition of ‘personal data’, the need for businesses to tighten up their data protection procedures has never been greater.
UK GDPR applies to data controllers and processors inside the UK whose processing activities relate to the offering of goods or services to, or the monitoring of the behaviour of data subjects.
Charities must necessarily include compliance with current data protection principles and with the UK GDPR, in order to minimise the risk of finding themselves at odds with the new rules and open to hefty fines.
Find out more about UK GDPR for charities
Get legal assistance from LawBite
We hope you’ve enjoyed our guide to setting up a charity, keeping the organisation’s legal matters in mind.
Whether you decide to go down the official ‘charity’ route or not, you should (hopefully!) take some wisdom and heed the best practice guidance of the Charity Commission and all those other wonderful organisations.
Finally, as this is only to be used as a guide, we would recommend you seek professional advice if you’re confused about any of the above- don’t get bitten.
LawBite can assist with your organisation’s legal queries for around half the price of a standard law firm, with relevant documents and advice. To book a free consultation with one of our expert charity lawyers, just click ‘Get started’ below.
