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The third sector is heavily regulated. Charities and nonprofits have a number of advantages over other organisations, so it makes sense to understand the benefits of the various governance structures available to ensure that you choose the right charity governance structure for your needs.
Essentially, this is all about ensuring that your charity is run correctly. From deciding who is responsible for key decisions, to how and when you recruit new staff, your governance structure is at the core of your charity’s success.
When you start a charity, it’s because there’s a cause that you want to promote. Paperwork and admin is simply a means to this end. Choosing the right governance structure will ensure that your charity runs smoothly.
Before we look at how to do this, let’s start with the basics.
What is a Charity Governance Structure?
A governance structure is a set of processes and systems which are put in place to ensure that your charity is run properly. Specifically, an appropriate charity governance structure ensures that:
Your charity complies with relevant legislation,
Your finances are in order,
Your charity is able to meet its goals,
You’re able to identify and resolve any problems.
While there are a range of different kinds of charity governance structure, they all share the same aims of:
Outlining how you will meet these goals,
Accounting for your performance,
Ensuring that your charity operates within the law.
Now that we understand the goals of deciding on governance structure, let’s take a closer look at the different structures available to you.
Types of Charity Governance Structure
Under UK law, there are only a handful of governance structures which charities can implement. These vary in terms of whether you can hire your own staff, whether you can have a wider membership and whether you are personally liable for organisational costs.
In the UK, there are four key types of charity governance structure. These are:
Charitable incorporated organisations,
Charitable companies,
Unincorporated associations,
Trusts.
Each of these has different advantages and disadvantages, so it is critical that you choose a governance structure which matches your goals, resources and operational needs. One of the first decisions is choosing between a corporate and a non-corporate governance structure.
What is a Corporate Governance Structure?
A corporate structure essentially means that your charity or organisation will be treated as an individual. In other words, if you run a charity with a corporate structure, it will be a separate legal entity.
This means that the charity has a right to do several things in its own name, including:
Hiring and paying staff,
Entering into contracts,
Owning assets and property.
In this case, the charity will be liable for anything relating to these activities. By contrast, if you opt for a non-corporate governance structure, your trustees will have personal liability for these.
With that in mind, let’s examine the main types of corporate and non-corporate charity governance structures. There are two types of each, depending on whether or not your charity has a wider membership.
Charities With a Corporate Structure
As noted already, charities with a corporate structure are treated as independent legal entities. If you opt for a corporate structure, you will next need to decide if your charity will need to have a large membership, beyond your trustees.
Depending on your preference here, you might either choose an association charitable incorporated organisation, a foundation charitable incorporated organisation or a charitable company as your governance structure.
Let’s take a look at each in turn.
Association Charitable Incorporated Organisations
An association CIO is a charitable organisation which offers membership to people who are not trustees. These can be voting or non-voting members. This is sometimes referred to as open membership.
There are a number of legal requirements for setting up an association CIO. Specifically, you must:
Adopt a constitution as your governing document,
Register with the Charities Commission,
Keep an up to date register of members and trustees,
Report your accounts to the Charities Commission.
Foundation CIOs
By contrast, a foundation CIO is a more appropriate governance structure for small charity organisations. Here, your membership is limited to your trustees, making it more appropriate for a small group of individuals. This is known as closed membership.
You will however still need to comply with the above legal requirements for running a CIO.
Charitable Companies
A charitable company can be set up with or without a wider membership. Essentially, this is a private limited company which undertakes charitable activities. However, there are a number of differences between a charitable company and a for-profit company.
Specifically, a charitable company:
Cannot distribute profits to shareholders,
Can only use its assets in pursuit of its charitable aims,
Must always operate towards the benefit of its cause.
Charitable companies are required to adopt articles of association as their governing documents.
Charities Without a Corporate Structure
Charities without a corporate structure are somewhat simpler. Here, you only have two charity governance structures to choose from. These are:
Unincorporated associations,
Trusts.
Let’s take a look at what each of these means, and when they are the right governance structure for you.
Unincorporated Associations
An unincorporated association is the best charity governance structure if you need a wider membership, but don’t need a corporate structure. Essentially, this is when a group of people come together for non-profit making activities.
For example, this could be a community group or sporting association.
It doesn’t cost anything to set up an unincorporated association, but you will still be personally liable for any assets, debts and costs. You’ll also need to adopt a constitution as your governing document.
Trusts
Finally, a trust is chosen as a charity governance structure when you don’t require a corporate structure, or a wider membership. For example, trusts often give out charitable grants, but don’t conduct any work of their own.
In other words, trusts typically don’t have large numbers of staff, or undertake charitable work. As such, all that is needed to register as a trust is a declaration of your total assets. You’ll also need a trust deed as your governing document.
How to Choose a Governance Structure for Your Charity
There are a number of different kinds of charities. Your governance structure will determine what you can do as a charity, as well as which legislation you’ll need to comply with.
Which governance structure is right for your charity depends on a number of factors, including your assets, membership and activities.
S3 Solutions are experts at organising effective charities. For advice on how to set up or restructure an organisation in the third sector, contact us today.
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