How to set up a not for profit company and legal issues to consider

People establish not-for-profit organisations for various compelling reasons, each driven by social purpose rather than profit generation:

• Addressing Community Needs - to provide essential services where commercial or public provision is lacking, from food banks to youth clubs

• Pursuing Charitable Missions - to advance causes like education, health research, poverty alleviation, or environmental protection

• Creating Social Impact - to generate positive change without the pressure to deliver shareholder returns

• Collective Action - to bring together individuals with shared interests, from hobby groups to professional associations

• Asset Protection - to hold community assets (buildings, land, facilities) in trust for public benefit

• Tax Efficiency - to benefit from tax advantages that allow more resources to be directed toward social purposes

• Ethical Business Model - to run sustainable trading activities with social goals at their core

The choice of legal structure should align with these fundamental motivations while providing appropriate protection, governance, and operational flexibility.

Regulation of not-for-profits in the UK

Not-for-profit organisations in the UK are subject to specific regulatory frameworks depending on their structure and activities.

Registered charities are primarily regulated by the Charity Commission in England and Wales (OSCR in Scotland, CCNI in Northern Ireland), which monitors governance, finances, and adherence to charitable purposes. Community Interest Companies are overseen by the CIC Regulator, ensuring they deliver community benefit and maintain their asset lock.

All incorporated entities must comply with Companies House requirements for financial reporting and record-keeping.

Additionally, specific activities may trigger sector-based regulation, such as the Fundraising Regulator for fundraising activities, the Care Quality Commission for care services, or Ofsted for children's services. This multi-layered regulatory landscape aims to ensure accountability, protect public trust, and maintain the integrity of the not-for-profit sector.

Most popular not for profit structures

• Company Limited by Guarantee (CLG) - The most widely used structure for UK not-for-profits, particularly suitable for medium to large organisations with staff and significant operations, organisations needing the credibility of a recognised corporate structure and/or Groups wanting the option to register as a charity while maintaining limited liability

• Charitable Incorporated Organisation (CIO) - Increasingly popular since its introduction in 2013, ideal for new charities starting from scratch that want simplified regulation, smaller unincorporated charities looking to incorporate and/or organisations focused exclusively on charitable purposes

• Community Interest Company (CIC) - The structure of choice for social enterprises, best for organisations with trading activities at their core, those wanting to pay directors or distribute limited profits and/or projects needing to demonstrate social value while operating commercially

• Unincorporated Association - Still common for grassroots organisations, appropriate for small community groups with minimal financial risk, volunteer-only organisations with limited funding and/or groups testing ideas before establishing a formal legal entity

Basic legal documents and issues to deal with

Essential legal requirements needed, either with legal help or through careful self-management include :-

• Mandatory policies - developing legally required policies including financial procedures, conflicts of interest management, data protection (GDPR compliance), and health and safety documentation

• Charitable objects - ensuring objects are precisely worded to qualify as charitable while covering all intended activities

• Articles of Association/Constitution - creating bespoke provisions when standard templates don't meet your governance needs

• Financial controls - implementing legal safeguards including segregation of duties, authorisation limits, regular reconciliations, and secure record storage

• Membership structures - creating different categories of members with varying voting rights or benefits

• Trustee/director powers - defining specific powers, limitations, or reserved matters requiring special approval

• Record-keeping systems - establishing legally required processes for board minutes, financial transactions, and key decisions

• Insurance coverage - securing appropriate public liability insurance, employer's liability insurance (legally mandatory with staff), trustee indemnity insurance, and contents insurance

• Grant agreements - complex funding arrangements with multiple conditions or match-funding requirements

• Employment documentation - creating legally compliant contracts, role descriptions, and volunteer agreements that clearly distinguish between employees and volunteers

• Property leases - when taking on property, especially long-term commitments or unusual terms

• Safeguarding frameworks - creating robust systems when working with vulnerable beneficiaries

• GDPR compliance systems - developing compliant data protection systems for sensitive personal information

• Intellectual property protection - ensuring clear ownership of content, methodologies, or creative works

• Trustee payment processes - proper procedures for legitimate payments to trustees outside standard expenses

• Collaboration agreements - formal arrangements with partner organisations for joint projects or shared services

• Conflicts of interest management - robust procedures for organisations with complex stakeholder relationships

Early legal advice can prevent costly mistakes and governance problems that might prove difficult to correct later.

Key risks

Founders, trustees, or directors may face financial ruin if forced to personally cover organisational debts or legal claims, potentially losing personal assets including homes and savings.

• Unincorporated associations: Committee members personally liable for debts and claims

• Incorporated structures: Limited liability only if directors/trustees act within their legal duties

• Breach of duties: Personal liability can arise for wrongful trading or breach of duties regardless of structure

• Practical mitigation: Consider trustee indemnity insurance; maintain proper records of decisions

Poor governance can lead to financial mismanagement, regulatory intervention, reputational damage, and ultimately organisational failure or forced closure. Risks include poor decision-making processes leading to financial mismanagement and unmanaged conflicts potentially invalidating decisions or damaging reputation.

Regulatory breaches can trigger investigations, fines, disqualification of trustees/directors, removal from registers, and permanent damage to funding prospects.

How to set up your not for profit

Setting up a not-for-profit organisation involves different processes depending on the structure you choose. Below is a step-by-step summary of what's required for each type, including approximate timelines and costs. These processes represent the standard path to establishment; more complex organisations with unusual features may require additional steps or professional support.

Unincorporated Association

1. Create a constitution outlining purposes, membership, and governance

2. Appoint committee members (chair, secretary, treasurer at minimum)

3. Open a bank account in the organization's name

4. Establish basic policies for finances and operations

5. Set up accounting records to track income and expenditure

6. Obtain appropriate insurance (public liability at minimum)

7. Register with HMRC for tax if employing staff or paying committee members

8. Register with Charity Commission (if charitable and income exceeds £5,000)

Timeline: 2-4 weeks Cost: No mandatory registration fees

Company Limited by Guarantee (Non-Charitable)

1. Choose a company name and check availability on Companies House

2. Prepare Articles of Association (use model articles or customize)

3. Identify directors (minimum one, three recommended)

4. Select a registered office address in the UK

5. Submit incorporation documents to Companies House (Form IN01)

6. Pay registration fee (£12 online, £40 paper)

7. Register with HMRC for Corporation Tax within 3 months

8. Set up accounting systems compliant with Companies Act

9. Open a bank account with company details

10. Develop key policies for governance and operations

Timeline: 24 hours to 2 weeks Cost: £12 (online) or £40 (paper) + professional fees if used

Charitable Company Limited by Guarantee

1. Complete CLG setup process as above

2. Ensure Articles include charitable objects and Charity Commission requirements

3. Prepare supporting documentation including trustee declaration forms, evidence of £5,000+ income/funding, public benefit statement and financial projections

4. Submit application to Charity Commission

5. Register with HMRC Charities for Gift Aid

6. Set up accounting systems to track restricted/unrestricted funds

7. Develop additional policies required for charities (safeguarding, conflicts)

8. Register with Fundraising Regulator if actively fundraising

Timeline: 2-3 months Cost: £12 (Companies House) + professional fees if used

Charitable Incorporated Organisation (CIO)

1. Choose a name and check availability on Charity Commission register

2. Select CIO model (Foundation or Association)

3. Adapt constitution template from Charity Commission

4. Recruit trustees (minimum of three recommended)

5. Submit application to Charity Commission online

6. Wait for registration approval (typically 4-8 weeks)

7. Register with HMRC Charities for Gift Aid

8. Open a bank account with CIO details

9. Develop key policies for governance, safeguarding, and operations

10. Set up accounting systems for charitable activities

Timeline: 6-12 weeks Cost: No registration fee + professional fees if used

Community Interest Company (CIC)

1. Choose a company name and check availability

2. Prepare Articles of Association with asset lock provisions

3. Draft Community Interest Statement explaining community benefit

4. Identify directors (minimum one)

5. Submit standard incorporation documents to Companies House

6. Include CIC36 form with Community Interest Statement

7. Pay registration fees (£12 company registration + £25 CIC fee)

8. Register with HMRC for Corporation Tax within 3 months

9. Set up accounting systems for financial reporting

10. Develop policies for governance and operations

Timeline: 2-3 weeks Cost: £37 registration fees + professional fees if used