Before setting up a charity or embarking on a philanthropic journey, there are a number of issues that are worth considering to ensure that the process runs smoothly and the structure chosen is a good fit for the proposed activities.
What work will the charity do?
Generally speaking, charities are divided into operational charities and grant makers. In essence, operational charities are organisations that do the charitable work (for example, food banks, research bodies and schools). Grant making charities do not carry on operational work but act as funders to other charities, by making grants. Before establishing a charity, therefore, you will need to decide the nature of the work which the charity will predominantly carry out, as well as whether the charity will do that work itself or fund others to do it. Often, individuals setting up charities are motivated to help solve social issues connected with the area where they grew up, health issues suffered by them or their families, or practical or ethical issues connected with their field of work.
Once the scope of the charity’s activities have been decided, those activities will need to be framed within an existing charitable purpose or purposes. All charities must further a purpose which has been accepted in law as charitable. Charitable purposes are codified in legislation and English law has a very wide definition of charitable purposes encompassing, for example, the relief of poverty, the advancement of education, the advancement of health, the protection of the environment and the advancement of religion. The statutory definition allows the Charity Commission to accept new purposes which it deems charitable from time to time, allowing the definition to remain relevant as social and economic conditions change. If you are planning to establish a charity, it is possible to be specific as to the work which a charity will do (for example, the advancement of health), where the charity will do it (in the UK or in a particular overseas country) and who the work will benefit (for example, children, elderly people or people of a particular faith or race). As an alternative, it is also possible to retain complete flexibility by allowing the charity to further any purpose which is charitable in English law.
Who will run the charity with you?
Charities are generally run by individual trustees who are responsible for the management and administration of the charity. In the case of philanthropy, many individuals have substantial expertise gained in a commercial context, giving them a good understanding of what success looks like. This expertise can usefully be transferred to the charitable space. Trustees give their time voluntarily, but there are statutory provisions allowing the remuneration of trustees for goods and services provided to the charity, subject to compliance with statutory provisions.
Care needs to be taken if it is intended that a trustee will be an employee of the charity – this is because of rules relating to private benefit that prevent a trustee from profiting from his or her trust. Overlapping trusteeship and employment almost always requires the involvement of the Charity Commission.
Charities are encouraged to ensure that their trustee boards represent as wide a range of skills as possible. If you are setting up a charity as a family project, it will be important to consider which members of the family would be willing to give their time as trustees. It is also worth considering whether the charity’s governing document should give particular powers to the founder of the charity (for example, a power to appoint trustees) and whether the governing document should provide for there to be a fixed number of family trustees in office.
Finally, it is important to remember that the charity is an independent entity with its funds held on public trusts. To that extent, it is necessary to manage conflicts of interest on the trustee board. Generally, it is necessary to have at least two independent trustees who are able to take decisions in a case where there are conflicts of interest.
How will the charity be structured?
In outline, there are three types of charitable vehicle which can be used.
The first is a charitable trust. It usually has individual trustees. The trustees hold the funds on trust for the specified charitable purposes. In circumstances where there are insufficient assets in the trust, the trustees can be personally liable if a claim is made against the trustees. As a result, charitable trusts are usually only used for grant making charities and are not frequently used by charities carrying out operational work (because operational charities are more likely to enter into contractual arrangements which might incur liability).
The second is a company limited by guarantee. This is a private company registered at Companies House and established for charitable purposes. It is similar to a private company limited by shares except that, instead of shareholders, there are members. Members give a guarantee that they will contribute a nominal sum (e.g. £1) to the company on a winding up. The company is not permitted to distribute profits and the members do not receive a dividend. Companies limited by guarantee are more commonly used than trusts.
The third is a charitable incorporated organisation (‘CIO’). The CIO is a incorporated vehicle created by statute because of a perceived need to have an easy to establish charitable vehicle with separate legal personality regulated only by the Charity Commission. It is, therefore, similar to a company limited by guarantee.
Funding
This is an important factor as it will determine the nature of the charitable work to be carried out as well as its scale and frequency.
Charities are generally set up by philanthropists when an individual’s interests or motivations merge with an inflection point in their lives. The inflection point is generally a liquidity event, for example, where an individual sells a company or a shareholding, or comes into wealth via an inheritance.
Where a significant sum of money is expected to be given to the charity, this can allow the establishment of an endowment, meaning that the capital can be retained by the charity with the income being spent on charitable grants. This is generally only encouraged if the sums in question are large – if a charity has a small endowment and is restricted to spending income, it can result in a situation where the charity is unable to achieve any real impact because the size of its grants is restricted to the income. It is also of course possible for the charity to be funded in smaller payments and also for the charity itself to fundraise to enable it to carry out its purposes.
An individual can make tax efficient gifts to a charity, for example, of shares or land, which can then be invested by the charity to produce a return or can be sold. It is becoming more common for philanthropists to gift some or all of a family business to a charity established by them. This can be achieved, subject to the management of conflicts of interest and investment regulatory requirements.
Timeline to establishment
A charitable trust or a company limited by guarantee can be set up in a matter of days. It then needs to be registered with the Charity Commission. Assuming that a detailed application is submitted with sufficient information on the proposed activities of the charity, it generally takes a couple of months to register a charity. This timeline can lengthen if the Commission raises queries. If a CIO is used, then it is established at the same time as registration with the Commission. Once the charity has been registered with the Commission it is necessary to apply to have it recognised by HMRC for tax purposes – this allows it to avail of the various tax exemptions available to charities.
We would be delighted to discuss your plans with you and work with you to help you to achieve your philanthropic goals.
If any of the above information is of interest to you or you would like to find out more, please do not hesitate to contact the author, Neasa Coen, or any other member of the Payne Hicks Beach Private Client Team, who offer a full range of legal services in the charity sector and would be delighted to assist you with setting up a charity of your own in any of the forms listed above.
