How to set up a charity or non profit organisation

Getting started with your non profit organisation

Any 'light bulb' moment which inspires you to set about doing something that enriches the lives of others is precious, and that passion and enthusiasm merits being put to good use. But this may not in itself mean it is a good idea to set up a new organisation immediately.



Think before you set up a non profit



The Charity Commission advises anyone thinking of setting up a new charity or other non profit organisation to do some research before going any further. There are already 180,000 registered charities in the UK and they estimate probably as many again smaller unregistered ones. More than 6,000 new charities were registered last year alone.



Look at what other non profit organisations are doing



What you plan to do may already be being done by others and duplication is discouraged as it results in similar causes competing for limited funds. This may result in damage to an existing charitable endeavour, which could adversely affect their vulnerable beneficiaries.



Researching what already exists in both your area of activity and geography should always be your starting point to ensure that your project genuinely adds value by filling a gap rather than duplicating and detracting from a pre-existing initiative. Working in conjunction with an existing initiative might be a "better" way to deliver public benefit.



Check your motivation

Are you prompted by outrage at hearing of a social injustice? Are you prompted by gratitude, or a feeling that "that could have been me"? Have you been through a bereavement and wish to do something in memory of a loved one? Are you at a stage in life where you do not have to use all your available work time to earn money to support yourself and your family? Do you simply want to give something back to your community?



Just as "dogs are for life and not just for Christmas", setting up a new organisation needs to be approached carefully with early consideration of long term sustainability and what will happen when you are personally no longer the driving force behind it. Harsh as it sounds, organisations which are overdependant on a founder are vulnerable and may not be sustainable. Effective founders need to be thinking of how they will be succeeded at an early stage.



Ask yourself some searching questions around why and how you want to be involved:



•Is my aim to benefit one individual or family or a wider group of people?

•Do I have a personal need to do this more than there is a real need for it to be done?

•Will my project fill a genuine gap or am I duplicating something which already exists?

Check your objectives

From the outset it helps to be very clear about your objectives when embarking on a project. You should be able to write them down briefly and clearly, so that your vision can be easily understood by others.



The process of writing objectives and testing them out on others will help you to check that your idea is worth taking forwards.



Vision and mission

Your project needs to have a clear and communicable statement of purpose. This should not be lengthy – two or three short lines is best. You will probably start out with a long and wordy expression of your vision; the process and discipline of distilling down to two or three succinct lines will result in wording which clearly and engagingly communicates your mission to others and encourages them to "get on the bus".



Write a mission statement

A useful process for generating your statement is:



•write down all your ideas and plans, without editing or

•prioritising them

•Sort them into natural groupings, using different colour pens

to indicate connected items.

•keep refining the groupings until you have 3 core ones

•try to write one sentence that captures the key messages from each of these groupings so that you end up with 3 sentences.

•Work these sentences into one paragraph.

Try your mission statement out on a few "critical friends". Ask

them to say back to you, in their own words, what it says, so that

you can ensure it says what you intended it to. This checking

process will be all the more helpful if you test it on a range of

people representative of the stakeholder groups you will need to

engage with if your project is to be successful. It is important to

challenge yourself and be open to constructive challenge by others to test out the validity and sustainability of your project.



Consider the time and talent needed for your non profit organisation



It might be helpful to consider the following questions:



•Do I know how much time (capacity) will be needed?

•Do I know what skills, experience, expertise, contacts (capability) are needed.?

•Do I have the necessary capacity and capability to set this up?

•How will I fund myself while I commit time to making it happen?

•Can I make a long-term commitment to see it through?

•Can my personal circumstances accommodate a major commitment to this activity?

•Do I have access to others who will 'get on the bus with me' to build the project’s capacity and capability?

•Who can be my 'critical friends' on the journey?

It can be really difficult to appraise your own strengths and weaknesses objectively and it is helpful from the outset to have a 'thought partner' who is well disposed but not directly involved in the project to act as a critical friend.



It can be helpful to make a detailed inventory of the skills and expertise that the project will need. Use your critical friend to help you list your own attributes and skills. This will help you identify what skills and expertise you need to bring into the project.



Think about what success will look like



To engage other people, including funders, it is crucial to be able to show what success will look like and to have a believable strategy and action plan to achieve it.



Think of it in terms of training to run a marathon: your goal is to run the full 25 miles but you build up to it in measurable stages, each challenging but achievable until you are cumulatively ready for the event itself.



Consider key milestones

You will need to develop a detailed project plan to demonstrate that you know what needs to be done and how to go about it. The following questions provide a useful model to start thinking about milestones over a three-year period:



•What will the organisation look like in three years?

•To achieve this, what will it look like in two years?

•To achieve this, what will it look like in one year?

•To achieve this, what is my monthly action plan for year 1?

Developing these plans will help to guide your efforts and activities and make your plans accessible to other people you involve.



If you decide to go ahead it is important to organise yourself properly. Don’t try and re-invent the wheel, seek advice from other organisations in your area and be open to learn from their mistakes; its about getting the job done well rather than proving yourself. It is most unlikely that you will be able to make a success of it all on your own so allowing other people to share the journey from the outset is beneficial.



What type of non profit organisation? Registered charities

The Charity Commission website, clearly and comprehensively explains what is involved in setting up a registered charity. There are rules and reporting requirements stipulated under charity law which must be adhered to. There are sometimes tax breaks available to registered charities and some other non profit organisations. These must be discussed and agreed with HMRC (the revenue authority) before assuming that your organisation will be eligible.



If you expect the income of the organisation to be less than £5000 a year it does not necessarily need to be a registered charity but it will still be regulated by the Charity Commission. And there are some funders who are only comfortable donating to registered charities.



There are strict rules relating to the objectives and activities of a would be charity, for example:



•It must be for the wider public benefit, and cannot participate in political lobbying.

•It will require a proper constitution – the charity commission provide a general model suitable for small charities as a starting point, but there are many variations. The constitution sets out how the charity is to be run properly.

•All Registered Charities are required to report annually to the Charity Commission; the degree of complexity depends on the size of the organisation.

Trustees are responsible in law for ensuring that charities are well run for the purposes of their charitable objectives and as set out in their constitution. To understand the role and responsibilities of Charity Governance and Trusteeship, visit the Governance section.



There are several questions you should consider when setting up a charity:



If I set up an organisation using the Charity Commission’s model constitution will that ensure that I can register it as a charity?

No, there is no automatic right to registration; it will still have to pass the public benefit test to qualify. The Charity Commission provide a model wording for charitable purposes which aims to ensure that charitable status is only granted to organisations whose purpose is entirely charitable and not to those seeking to add a charitable veneer in order to secure the tax breaks of charitable status.



When do trustees need to be appointed?

A minimum of three trustees need to be appointed from the outset; of these one must agree to act as chair and another as company secretary/treasurer.



This group will be responsible for publicly donated funds, ensuring that they are spent in achieving the agreed charitable purpose and that they are correctly accounted for. These are legal responsibilities. It is essential for example to set up a separate bank account for the new organisation with more than one signatory.



Donated money should not be paid into personal bank accounts. Expenses should be receipted and approved by someone other than the claimant and exclusively for the purposes of furthering the organisations charitable purposes. Trustees are so called because they are in a position of trust, in law, accountable for donated funds and expenditure out of them.



Where can we get advice?

Local authority websites are a good starting place for information and support. There will be local community development organisations in your area who are there to help.



It is wise to think about securing professional advice from local solicitor’s and accountants, many of whom will consider working initially on a pro bono basis on the understanding that they will be formally appointed as paid professional advisors once the organisation is able to make such a commitment. Having a lawyer or accountant on your board of trustees does not meet this requirement as they are not retained in their professional capacity and cannot be considered independent.



How do we go about selecting professional advisors

It is always helpful to see who is working with other non profit organisations in your area. Personal recommendations can be useful but should always be endorsed independently and by your own research. "Favours" are not always free in the long run and can indeed be costly if they result in sub-standard work.



Professional advisors are key appointments and it is important that the firms chosen are good and that you feel comfortable working with them. Ideally you should identify three of four potential choices, talk to them about your needs and get them to pitch for your business. Many future stakeholders will be careful to check out your professional advisors before committing to your work.



What about accounts?



You should expect to pay for audited accounts and banks will have standard rates, terms and conditions even for non profit organisations. Its worth shopping around to get the best service and competitive rates and bear in mind that you will be potentially embarking upon a long relationship which needs to endure and evolve.



What type of non profit organisation? Social enterprises



A social enterprise is a business with primarily social objectives. Its surpluses are principally reinvested for that purpose in the business or in the community, rather than striving to maximise profit and owner/shareholder value. They can enjoy some tax benefits but these should not be assumed and should be clarified with HMRC before proceeding on a basis which relies upon them for viability.



They differ from registered charities in that they expect to be revenue generating from the service they provide, although this income may well need to be supplemented by other sources of funding. A registered charity generally raises money from third party sources to fund the service they provide free of charge to vulnerable beneficiaries.



There are a variety of social enterprise vehicles to consider. The mostly recently devised list is as follows:



Charitable incorporated organisations (CIO)



From spring 2010, this is a legal form of organisation designed for charities registered in England and Wales. Directors are called charity trustees but in most other respects will operate more like companies than charities.



CIO’s are always incorporated distinct legal entities and members have either no or limited liability. CIO assets are ring fenced for their charitable purpose, so profits and assets cannot be distributed to members.



CIO’s only report to the Charity Commision and not to Companies House or the Financial Services Authority.



Community Benefit Societies (BenComs)



These are incorporated Industrial and Provident Societies (IPS) that conduct business for the benefit of their community. Profits are not shared amongst members or external shareholders but returned to the community. A local nursery school may take this form to allow staff to take part in decision making.



BenComs are run by their members, with a social purpose, and are designed to conduct a business or trade. They have to have annual accounts, and can issue shares to the public. They may be eligible to be registered as charities which would enable them to raise funds from those who make grants exclusively to registered charities. If they receive Charity Commision approval they are referred to as 'exempt charities' which means that they report only to the Financial Services Authority (FSA) and not the charities regulator.



Co-operatives



Co-operatives operate for the mutual benefit of their members and can sometimes be social enterprises depending on their purpose and what happens to any profit/surpluses. They cannot register as charities.



Community Interest Companies (CICS)

These are limited companies established to benefit a community or a specific section of a community. CICS are very similar to any other small company and can raise finance in a variety of ways. Unlike a commercial company however, there is a requirement for a community interest statement and assets are locked into being used exclusively for that purpose.



CICS need to be registered with the Charity Commission; their website has details of the required fees.



A CIC needs to registered with Companies House and are also subject to regulation by the CIC Regulator. You must either register as a company limited by shares or a company limited by guarantee. To secure CIC status you will have to provide an acceptable community interest statement detailing your purpose and this will be subject to a community interest test. For details of what is and isn’t permitted regarding asset transfers, share issues and annual reporting go to the Business Link website.



A community dance group is an example of a CIC.



Limited companies with a social purpose.



These are organisations where members have limited liabilities. To set one up as a social enterprise you can choose between a private Company Limited by Shares (CLS) and a private Company Limited by guarantee (CLG). A CLS cannot sell its shares to the general public; a CLG cannot raise finance by issuing shares, nor pay dividends to members.



An example of a limited company with a social purpose as a social enterprise could be one set up to regenerate/benefit a particularly underprivileged area or group of people.



Trusts

This is a legal device rather than a legal entity. A trust dictates how assets given by an individual or organisation are to be used, perhaps for education or conservation for example. They are unincorporated and do not distribute profits. They are managed by trustees who cannot be beneficiaries. They make up their own governing rules. Trustees remain liable for any liabilities of the trust. They may or may not need to be registered with Companies House.



If the trust has exclusively charitable purposes for the public benefit they may be eligible to be registered with the Charity Commission as Charitable Trusts.



Development Trusts



These are another variation of trusts, owned and run by the community, frequently established as a company limited by guarantee and occasionally eligible for registration as a charity.



Unincorporated associations

This is a relatively informal vehicle chosen when a group of like-minded individuals agree/contract to "come together for a common good", perhaps a social activity. They are self regulated, do not have to make annual returns, make up their own rules and appoint their own management committee. They are not legal entities and members remain individually and personally liable for any contractual commitments entered into. Some residents associations are examples of this structure.



Final advice on legal requirements



There are a number of different structures with differing registration, regulation and reporting requirements and membership liability implications. Given this diversity and complexity it is wise always to take qualified professional advice at the outset.



If your project is likely to involve fundraising and/or delivering a service to vulnerable beneficiaries its is likely that registering as a company limited by guarantee and as a charity will be advisable. Again, always secure good professional advice.



KnowHow NonProfit is a new portal for people working in the third sector. It covers all areas of setting up and managing a non-profit organisation. It is the first port of call for people wanting to share ideas and expertise about their work in the charity sector.