Starting A Non Profit - How Decide Whether To Set Up A Social Enterprise (CIC) Or A Charity?

When setting up or starting a nonprofit, most think of a charity or Community Interest Company (CIC), but which to choose and there are actually a lot of different types of both. This resource provides a practical guide and checklist to help you make the best choice.

Do I Need To Set Up A Non Profit At All?

Setting up and running a non profit involves time and workload, so here are some options to avoid that.

  • Work With An Existing Charity.  If you wish to raise funds for a particular cause, you could always do so for an existing charity or work in partnership with them - you can search for one here. If you're looking for a charity that works outside the UK, you might also try this site. Working with an established organisation also enables you to benefit from their support and expertise.
  • Create A Named Fund.  Alternatively, you could either set up a named fund with a community foundation. It's far easier and a lot less work than setting up and running a charity, but are UK only and not all foundations offer this. There's helpful information on the Heart of Bucks Foundation website and you can find your local community foundation here. If you're based in Kent, you'll want to be aware of the Lawson Trust Million Pound Endowment Match Challenge.
  • Create A Managed Fund.  If you're confident of raising more than £20,000 pa, Prism Funds, operate Collective Funds. You won't need to register, as a charity, and they provide the administration and governance. If you have £10,000 or more to donate, you could set-up a Charities Aid Foundation charitable trust. There are some charges, you would be a signatory, rather than a trustee and the funding must be irrevocably gifted, but CAF manage everything for you.

Starting An Ethical Company

The line between charities and private business is becoming more blurred and being an ethical company can have real commercial benefits, including improved customer perception and greater staff engagement. There are a range of options.

  • The Purposely website will ask you a series of questions, offer you the best options and will even create your new Memorandum and Articles, all completely free of charge.
  • B Corp is a business that balances purpose and profit. Well known in the US, but less so in the UK. However, some well known organisations are B Corps: Alpro, Charity Bank, Alesssi, Hootsuite and Dr Haushka. You can find out more here.

Key Questions To Ask In Deciding Whether To Start A Social Enterprise Or Charity

Here are some key questions you need to ask in order to make the best choice for you.

  • How quickly do I want to set my non profit up?  You need quite a bit of information to set either up, but once submitted a Companies House decision on registering a CIC normally takes only a couple of days.  Charity registration decisions can take several months and securing registration for a charity is much more challenging. 
  • How much flexibility/control do I want?  CICs only require 2 directors and, as the Managing Director, you can be a member of the Board.  Charities require at least 3 trustees and are more bureaucratic.    
  • Will I be getting paid?  If anyone on the Board has a close personal or business relationship with a member of staff or company you will work with, there's a conflict of interest, which you will need to manage.  The directors of a CIC can be paid.  Trustees of a charity can also be paid, but it's quite a bit more bureaucratic.  
  • Do I need limited liability protection?  If your non profit is incorporated (registered), you directors/trustees will have limited liability protection.  Unincorporated associations (unregistered charities) and charitable trusts do not. If you will have substantive contracts, such as a building lease, or employing staff or undertaking activities that pose some potential risk of being sued, you will almost certainly wish to be incorporated.  
  • Will we be trading?  Both charities and social enterprises can trade, but it can be more complicated if you're a charity.  If your charity trading falls within your objects (primary purpose), you shouldn't have corporation tax liability.  However, if it's not (secondary purpose), you may have to set up a trading subsidiary, if the amount exceeds the small trading tax exemption limit.   
  • How will my non profit be funded?  Charities are more bureaucratic, but the payback is that they are by far more useful for fundraising and enjoy a range of charitable tax reliefs that CICs do not, particularly Gift Aid.  Gift Aid adds 25% to charitable donations from eligible UK tax payers.  

The Different Types Of Charity And Social Enterprise

  • Starting A Social Enterprise - a social enterprise is a company that uses its profits and assets for the public good. Community Interest Companies (CICs) are probably the most well known, but there are range of other legal structures - here's a useful guide
    • A CIC Limited By Guarantee is the only type that can convert to a charity, if you subsequently wish to. 
    • Community Amateur Sports Clubs (CASCs) are not a legal structure as such, but allows local amateur sports clubs to register with HMRC and benefit from a range of tax reliefs, including Gift Aid.
    • There are less common alternatives, such as Community Benefit Societies (previously Industrial & Provident) and Cooperatives that trade, for the benefit of the community, or their members respectively.
  • Starting A Charity.  There are 4 legal structures for registered charities; charitable trusts, charitable companies and 2 models of Charity Incorporated Organisations (CIO) - the foundation model (no voting members) and the association model (voting members).   
    • Although less well known, there are an estimated 100k unincorporated associations (unregistered charities) in the UK.  These do not have limited liability protection, you must register if your income exceeds £5k pa and some funders will only support registered charities.  However, these are very quick and easy to set up, you can open a bank account and register with HMRC for Gift Aid.

Should I Start a CIC or Registered Charity?

This infographic shows you visually the most common types of non profit and the pros and cons of each. 

However, by far the 2 most common choices are a CIC Limited By Guarantee or a registered charity, usually a Foundation CIO. 

  • CIC Limited By Guarantee - is quicker and simpler to set-up, has more of a 'business' image than charities and can pay board directors, but don't qualify for charity tax reliefs and, whilst fundraising is possible, it's more difficult.
  • Registered Charities - are best for fundraising, can claim the extensive charitable tax reliefs, but are much harder to set up, more bureaucratic to run and paying trustees is more complicated.  

What Do I Do Now?

The Charity Excellence Start-up Toolbox gives you everything you need to make your new non-profit a success.  Simple, practical toolkits - getting started in fundraising, registering a charity, challenging Charity Commission decisions, registering a CIC, registering with HMRC, how to claim Gift Aid, opening a free bank account and choosing a fundraising platform, with links to 100+ to choose from.

You can find the funding you'll need using the Funding Finder database, which includes search categories for both social enterprises and small charities & community groups, as well as 50+ downloadable funder lists.  You can also health check your charity or CIC in half a day, access the huge resource base, including 100s of organisations that provide free help and resources, and achieve the Quality Mark.

Fast, Simple And Everything Is Free.

To find the help and funding you need – Register Now

Caveat!

I am neither a qualified accountant, nor a lawyer, so am not competent to provide professional advice, so this is simply a layman's guide.  if you need professional advice, you should seek it, as my guide is no substitute for this.  You can find links to pro bono support on the Free Goods & Services page. 

The questions are phrased brilliantly - challenging how we prioritise our management time." Ecosystems Knowledge Network

Register Now