Registration on a plate

There are now over 160,000 registered charities in the UK. If you want to join them and set up an organisation to benefit your community, is it worthwhile applying for charitable status?

Advantages

Respectability: If you depend on the public as a source of funding and on volunteers, then having charitable status will reassure people. Also grant-giving bodies may prefer to sponsor organisations that are registered charities.

Tax advantages: Charities can be exempt from a range of taxes including Corporation Tax, Capital Gains Tax, Inheritance Tax, Stamp Duty and VAT. They can also be eligible 80% relief from Business Rates. The laws governing tax breaks for charities are highly complex - see resources for a link to the Inland Revenue Service.

Administrative simplicity: Charitable trustees can make their decisions by a majority vote - whereas trustees of private trusts may be forced to act by unanimous decision. If a charity becomes defunct, funds given to it can be usually be reallocated to another similar charity.

Disadvantages

Restrictions: There are limits set by the Charity Commission on the activities of charities, notably campaigning with a political dimension. Sanctions can be imposed and the tax authorities may withdraw exemptions.

Paperwork: All charities, apart from those with an annual income or expenditure of less than £10,000, have to submit an annual report and statement of accounts to the Charity Commission. These are open to public inspection.

Trustees are personally liable: Charity trustees assume a serious responsibility, and may become personally liable for wrongful behaviour by their organisation.

Not for profit: Profits of a charity cannot be distributed to members, and trustees are not allowed to receive a salary from the charity.

Legal definition

To become a charity your organisation's aims must correspond with one of the four legal categories:

• Trusts for the relief of poverty.
• Trusts for the advancement of education.
• Trusts for the advancement of religion.
• Trusts for other purposes beneficial to the community not falling under any of the above headings.

Which type of charity?

If you do decide to register, you need to decide which form of charitable status best suits your aims:

Trusts

In a trust, the trustees hold the legal ownership of the charity's property - money, equipment, land - and it's their duty to administer these assets to advance the purposes of the charity. A trust is appropriate when the charity is run by a small group of elected people, and not by its members. Decisions are made by a majority vote of the trustees, a fairly simple form of administration. The governing document of a trust is known as the trust deed or declaration of trust.

Companies limited by guarantee

The law regards a company in the same way as an individual. A company can therefore own property and enter into contracts in its own right. The real benefit is the idea of 'limited liability', which protects personal assets from commercial risk, unless the company's inability to pay was caused by deliberate wrongdoing by that person. This system is suitable for larger charities with numerous employees and commercial contracts. The governing documents of a company are its memorandum and articles of association. For more details see limited by guarantee.

Unincorporated associations

An unincorporated association acts through its individual officers and other members by regularly appointing them to take decisions as temporary trustees. This is a more democratic system than trusts and particularly suits membership organisations. Unincorporated associations have constitutions as their governing documents, but they are complex and can lead to delays in getting decisions made.

Other legislation

The law governing charities is complex and wide-ranging. The Charities Acts of 1992 and 1993 (which apply only to England and Wales) are the most recent legislation relating to charities. Their key points are:

• A charity can be compelled to change its name.
• Registration details must appear on certain documents and materials - such as adverts and fundraising materials - if a charity has an annual income in excess of £10,000.

The Charity Commission regulates charities in England and Wales. It has also created:

• A new regime for accounts, audits, reports and returns - see accounting.
• New public rights to inspect various documents.
• Requirements about using professional fundraisers.
• New rules relating to public charitable collections.

Getting registered

If you feel your organisation needs to register as a charity, follow the three steps to registration.

After registration

Registered charities in England and Wales are entered onto the Charity Commission's charity database. This contains detailed information such as area of operation, area of benefit and type of governing document. Charities with an income or expenditure exceeding £10,000 are required to submit their annual report and full annual accounts to the Charity Commission.

Changing direction

Once a charity has been registered, the 'ultra vires' rule states that resources can only be used for the purposes described in the governing document. But there is a way to alter and modernise charities in certain circumstances.