This guide explores the potential and reasons to set up as a charitable organisation and signposts to the resources that tell you how: Can you set up a charity? Should you set up a charity? Advantages and disadvantages If so, what next?
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Can you set up a charity? Establishing a charity is a more regulated and accountable process than setting up as another type of organisation. You need to check whether the type of organisation you have, or want to have, and the activities you (will) undertake, allow you to be a charity. The Office of the Scottish Charity Regulator (OSCR) is the body responsible for regulating charities and can only enter an organisation on the Scottish Charity Register if it meets specific criteria.
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You must prove that your organisation; Has only charitable purposes - its money and other assets must be used for recognised charitable causes. ‘The advancement of the arts, heritage, culture or science’ and ‘the advancement of education’ are the recognised charitable causes which underpin the charitable purpose and status of most arts organisations. Benefits the public - it must not unduly restrict access to benefits or only benefit those associated with it. Has passed the ‘charity test’ - it must prove its charitable purpose and public benefit, and that its constitution and activities don’t conflict with charitable status.
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It is against the law to describe yourself as a charity unless you are on the Scottish Charity Register.
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Should you set up a charity? There are many advantages and disadvantages to consider before deciding.
Advantages •
Becoming a charitable organisation can help you establish a shared responsibility and legacy for activities beyond your personal
involvement. •
Being regulated can assure you of public goodwill and trust which can also help to secure donations and funding.
•
Companies may be more likely to make in kind donations.
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•
Some funders, (e.g. trust and foundations), may only consider charities because of the way they were set up or to be sure their money will be used for the purposes they wish to support.
•
If you receive donations from someone who pays income tax you can reclaim a share of the tax under the Gift Aid scheme with HMRC.
•
Charities qualify for other tax benefits, some VAT exemptions and
rates relief from some local authorities. •
Charities have to be governed by trustees who ensure the effective running of the charity. Trustees can bring valuable knowledge, experience and contacts to your organisation.
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Disadvantages •
There are legal restrictions on what charities can and cannot do, e.g. cannot use assets or profits for non-charitable purposes or become involved in any overtly political campaigns.
•
You will have to invest resources in administration and accounting to fulfil annual reporting requirements.
•
You will have to invest time to find the right trustees for the charity, and to brief them about their responsibilities, your programme and operations so they can take well-informed decisions. 7/16
•
There are restrictions on when and what trustees can be paid by the charity for work they do. They can only be paid reasonable out of pocket expenses for their governance work and not be paid staff. They can be paid for work other than governance if decisions on paying a trustee are made by the board when that trustee in not present and has no influence over the outcome, and in line with the rules laid out in the charity's constitution, and at rates which are best for the charity. The majority of the trustees must remain unpaid. While it is legal to pay trustees in this way it is considered by many funders to be bad practice as a charity should not be set up in order to create an income for its trustees.
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•
The ultimate responsibility for the financial management and direction of the organisation lies with the board of trustees, which can lead to tensions with and the removal of senior staff e.g. artistic directors.
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There are restrictions on the type of trade a charity can undertake as all activity has to meet its stated charitable aims. So if your organisation wants to grow or expand its earned income, you may
have to consider setting up a separate trading arm, with all the accompanying paperwork and cost. 9/16
•
Once you have set up as a charity it is quite difficult to deregister. And if you do, you have to give any assets the charity has bought, such as premises, office equipment, vans and so on, to another charity with similar objectives. In other words, you would not be able to sell these assets to repay debts, or use them for a more commercial venture.
•
Being a charity does not guarantee more funding and most
funding application processes are highly competitive.
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If so, what next? OSCR advises that the first step is to decide which organisational structure is most appropriate for you;
either a non-profit distributing organisation,
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or the purpose built structure, a SCIO.
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Which you choose depends on whether; •
you are already operating as an organisation
•
you require limited liability for your trustees
•
you can only manage one set of annual reporting and administration
•
your organisation needs to continue to exist if it were to be removed from the charity register in the future.
OSCR’s publication, SCIOs: A Guide includes a table which compares the characteristics of a SCIO against a Trust, Company or Association so you can weigh up the advantages and risks of each.
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Next, you will need to; •
Decide who will run your charity i.e. be on the board of trustees
•
Prepare a constitution or governing document setting out your
organisation’s purpose and management •
Decide on a name and check it against the Scottish Charity Register
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Your trustees and constitution will all need to be in place before you can apply to OSCR. The process of recruitment and writing the constitution and proposed activities with them should help ensure that the commitment, administration, resources and skills are in place to run a charity. OSCR produces very clear advice on becoming a charity and what else you need to apply to them with.
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Next steps For further information on this subject, please refer to the following resources: Setting Up a Company Keeping Financial Records Guide
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Disclaimer: Cultural Enterprise Office is not responsible for any advice or information provided by any external organisation referenced in this document.