How to set up a non-profit business

So, you’ve identified a good cause and you’re passionate about supporting, promoting and advancing it. You’ve also researched existing organisations established for that cause, and you’ve concluded that either there aren’t any, or else those that already exist don’t hit the mark you’re aiming at or tackle the issue in the way you envision.

Therefore, you decide to set up your own non-profit - but how do you go about it and what type of non-profit should you choose? In this article, we discuss the different types of non-profit businesses and how you can set up your own.

Types of non-profit 

Non-profits are commonly misunderstood as being charities and social enterprises that don’t make a profit. However, this isn’t true. A non-profit is a type of business that makes a profit, but these profits are applied to the organisation’s social purpose instead of being distributed to shareholders. 

Common types of non-profit organisations include:

• Charities: must have exclusively charitable purposes and be for the public benefit. They are subject to charity law and are heavily regulated, but with significant advantages such as tax breaks and enhanced ability to fundraise
• Community interest companies (CIC): like a regular company, but with built-in protections, including that it must undertake activities for a community purpose and also an asset lock which prevents the distribution of profits to shareholders or members
• Co-operative and community benefit societies: these are registered organisations formed to help a broad membership and give them a say in the organisation’s management
• Limited liability partnerships (LLP): members have limited liability and are related to company directors. An LLP agreement between the members and the LLP outlines members’ rights and duties and protects the LLP’s social purpose
• Unincorporated associations: membership group that agrees on rules by which a particular purpose, such as a sports club, is operated. Management committee members have personal liability

Formation and registration

Charities

A charity isn’t in itself a legal structure. If you’re setting up a charity you’ll need to choose an appropriate structure according to what your charity will do and how it’ll operate. 

The charity may be unincorporated, meaning that the trustees have personal liability and the charity can only act through them (it isn’t itself a legal person) or incorporated, meaning that the trustees have the protection of limited liability.

Common unincorporated structures are trusts or unincorporated associations. These are only really suitable for the simplest charities with the lowest risk.

The most common incorporated structures are a company limited by guarantee (there are no shareholders) or a charitable incorporated organisation. These are suitable for most charities, including those that provide services and enter into contracts. 

Whatever the chosen structure of your charity, you’ll need to:

• Appoint appropriate trustees, usually at least three
• Draft the charity’s governing document, which type depends on which structure you’ve chosen, including the all-important charitable purposes, which is like the legal statement of what the charity exists to do
• If you’re a company, incorporate the company at Companies House (Crunch can do this for just £10)
• If your charity meets the registration threshold (annual income of £5,000) or if it’s a charitable incorporated organisation, apply to register with the Charity Commission
• Open a charity bank account
• Apply to HMRC to register the charity for tax purposes and ensure that you are aware of the policies in place for tax relief on charitable donations.

In addition to these registration requirements, all charities must comply with relevant laws 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 that 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 for the preparation of compliant accounts

Non-charity, non-profits

Nearly all non-profits will need to register with the Charity Commission if their income is higher than £5,000 per year. Charitable Incorporated Organisations should register even if their income is less than this. Whatever the case, you’ll need to:

• Appoint board members, directors or designated / committee members
• Draft the governing document, which type depends on which structure you’ve chosen, including the social or community purpose
• If a CIC or an LLP, apply to incorporate at Companies House, CICs apply simultaneously to register with the CIC Regulator
• If a co-operative or community benefit society, apply to register with the Financial Conduct Authority (FCA)
• Open a bank account
• Apply to HMRC to register as necessary for tax purposes

Reporting requirements

All non-profits must prepare annual accounts appropriately, which must be filed with the relevant regulator, the Charity Commission, Companies House, and the FCA.

Regulators will require a form of annual return or confirmation statement. CICs must file a community interest report with the CIC Regulator, and the organisation determines other reporting requirements.

Wrapping up

All non-profits are subject to the usual laws for businesses such as data protection, intellectual property and regulatory compliance. If you’re setting up a charity, you’ll also need to consider how to protect your business, in the same way you would if you were to be starting any new venture. You may also get to the point where you can seek support from others, and volunteers may become an asset to your organisation - using your spare time for volunteering is a productive way to grow awareness, and you'll also build a community around your organisation this way, too.

Different laws apply elsewhere in the British Isles, so if you operate in Scotland or the Republic of Ireland, for example, check the relevant rules. No matter the cause that you're setting up a non-profit for, make sure you stick to the laws for forming and running it. 

About the author 

Jayne Adams is a specialist charity lawyer at LawBite and has years of experience advising charities and non-profits on legal and governance matters. LawBite has created several fixed-price charity products, to support socially conscious entrepreneurs with the formation and running of a charity. Find out more about their expert legal advice for charities.