The term “non-profit” is broad and used to describe all independent organisations whose main purpose is doing something other than making a profit for directors, board members, or shareholders.
There are a range of different types of organisations that can be a non-profit, as the term itself is not a legal structure. The five main types of structure are:
- Unincorporated Association
An unincorporated association, otherwise be known as a “membership organisation”, can be whatever its members want it to be and carry out whatever activities its members choose. For example, most community groups are unincorporated associations, as they run entirely by volunteers to benefit their own members, improve their local neighbourhood, or run campaigns for a variety of causes.
Unincorporated associations typically have very small budgets, and don’t employ staff, or lease or own premises. They are quick and easy to set up, and only require a written constitution setting out the rules under which it will be run. However, they cannot enter into formal contracts or own property.
A charity can be an unincorporated association if it has charitable aims within its constitution and is run for public benefit. If its annual income is over £5,000 per year, it must also be registered with the Charity Commission.
- Charitable Trust
A charitable trust is relatively simple and inexpensive to set up compared to the other structures. It is usually run by a small group of people called the “trustees”, who are appointed instead of elected. A charitable trust is not incorporated, so the trustees are personally liable for what it does, it cannot enter into formal contracts or control investments in its own name, and it cannot own property.
To set up a trust, the trustees must write and sign a trust deed, which must show that the organisation is legally charitable. If the annual income is over £5,000 per year, the charitable trust must also register with the Charity Commission.
- Charitable Incorporated Organisation (CIO)
This type of charity is incorporated and is a new type of legal structure introduced in 2013. There are two types of CIO – Association Model and Foundation Model. Association Model CIOs are membership organisations that hold elections, and Foundation Model CIOs are run by a small group of appointed trustees without wider membership.
CIOs must be registered with the Charity Commission regardless of their income. However, unlike charitable companies they do not need to be registered with Companies House. Unlike a Trust or Unincorporated Association, a CIO is a separate legal entity, which provides its members with a certain level of protection.
A CIO can employ individuals, deliver charitable services under contractual arrangements, enter into commercial contracts in its own name, and own property.
- Company Limited by Guarantee
This is one of the most common legal structures for a charity. It is a limited liability company, which is incorporated and registered with Companies House. However, it does not distribute income to shareholders, instead surplus income is reinvested back in to the organisation. This type of organisation has voting members, as well as a group of directors, who can be paid or unpaid. However, to be considered charitable, the directors are usually unpaid.
Establishing a charitable company involves registering with the Charity Commission, as well as Companies House, and submitting an annual report and accounts to both organisations annually.
A company limited by guarantee can employ individuals, deliver charitable services under contractual arrangements, enter into commercial contracts in its own name, and own property.
- Community Interest Company (CIC)
A non-charitable company can still be a not-for-profit organisation, such as a social enterprise. Instead of relying on grants and donations, these organisations sell goods or services. Often controlled by volunteers, they can also be controlled by people who have invested in them, people who are paid to work for them, or people who benefit as customers. CICs can have paid directors.
If an organisation is not charitable, it can guarantee its not-for-profit status by becoming a Community Interest Company. CICs commit their assets and profits permanently to the community be means of an “asset lock”, ensuring that assets are used for the benefit of the community.