What's the differences between a charity and a not-for-profit

A group of charity volunteers standing together around a table of donated items

We’ve put this guide together to help distinguish between a charity and a not-for-profit organisation and explain what this may mean when it comes to charity insurance.

non-profit

adjective (also not-for-profit)

not intended to make a profit, but to make money for a social or political purpose or to provide a service that people need:

charity

noun, charity noun (GIVING)

an organisation whose purpose is to give money, food, or help to those who need it, or to carry out activities such as medical research that will help people in need, and not to make a profit:

--------------------------------------------

It is a common misconception that charities and not-for-profit organisations are one and the same, but when it comes to the type of charity, location and insurance requirements it is important to understand their differences.

All charities have a duty of care to protect their assets and resources, which is why you should consider insurance to protect the organisation’s property, people, money, and reputation.

What is a charity?

Whilst the requirements of being a charity are similar across the UK, the regulators are different in England and Wales to that of Scotland and carry slightly different wording.

The Charity Commission for England and Wales states that to be a charity in England and Wales, your organisation must satisfy the definition of a charity in the Charities Act (1).

The Charities Act says that a charity is an institution which:

If your charity exceeds £5,000 per annum, you must register with the Charity Commission (England and Wales), but if your organisation has a mix of charitable and non-charitable activities it will not meet the definition of a charity

In Scotland the wording for a charity is slightly different but broadly covers the same requirements. The Scottish Charity Regulator (OSCR) states that Your organisation can only become a charity if it meets the charity test. To do this it must have only charitable purposes and it must provide public benefit.” (https://www.oscr.org.uk/becoming-a-charity)

How is a charity structured?

The four types of legal structure for a charity:

  • Charitable incorporated organisation (CIO) – A charity that is only regulated by the Charity Commission, rather than both the Charity Commission and Companies House. Trustees benefit from limited liability protection, meaning they will not be held personally liable should the charity fall into financial difficulty.
  • Charitable company (limited by guarantee) – Must be registered with both the Charity Commission and Companies House. The organisation will have the freedom to own property and transact business with third parties on its own behalf without the need for trustees. The charity will be liable for its own debts.
  • Unincorporated association – A group of people working together towards a shared goal for the benefit of the public, but not working to a formal structure. Good examples of an unincorporated association include non-profit clubs and community groups.
  • Trust – A charitable trust is where assets are assigned to a trustee/board of trustees, who can control and use those assets, and any income they generate, to fund their charity activities. There are many different types of trust, please see Gov.uk for more information.

As such, you must decide which legal structure to opt for when setting up your charity, which will be defined by its governing document.

The structure of your charity will affect how your charity operates, including:

  • Who will run the charity?
  • Will it need a corporate structure?
  • Whether it needs to have a wider membership
  • Whether it can enter contracts
  • Whether it can employ staff in its own name
  • Whether the charity’s trustees will be personally liable for what the charity does

What is a not-for-profit organisation?

A not-for-profit organisation (also known as non-profit) is a business that aims to do something other than make profit for its owners. It needs to make enough money to cover its costs, but any surplus is reinvested into the business or used in other ways, such as providing a public service or helping people in some way (https://www.bbc.co.uk/bitesize/guides/zdc6mfr/revision/5).

According to Thomas Reuters Practical Law, some non-profit organisations are ineligible for beneficial tax treatment and cannot be defined as charities. However, these organisations enjoy greater freedom and flexibility in not having to comply with charity law.

Examples of non-profit organisations that are not charities includes:

Company limited by guarantee – Incorporation is the same as for a charitable company, except that there is more flexibility in the terms of the articles of association. No registration with the Charity Commission is required. Non-charitable companies limited by guarantee must register with HMRC.

Community Interest Company (CIC) – Setting up a CIC is broadly the same, except there are some differences in the articles of association, including:

  • An object for the community benefit
  • The CIC's asset lock, which restricts distribution of the CIC’s assets to the shareholders/members beyond a certain level.

The application for incorporation is submitted to the CIC Regulator and includes a community interest statement, describing the CIC's intended activities and the community it will serve.

CICs can’t register with the Charity Commission and must register with HMRC, the same as non-charitable companies.

What is obvious is the key differentiator between a charity and a non-profit is whether the non-profit can register with the Charity Commission.

What does this mean for your charity insurance?

Charity insurance is designed to cover the risks facing small charities, local community groups and not-for-profit organisations, such as an accident to a member of the public at an event, or an allegation of wrongdoing by a trustee, or a volunteer injuring themselves whilst working for the charity. Each of these instances can result in an expensive insurance claim.

Cover available from Markel Direct includes professional indemnity insurance, public liability and employers’ liability insurance, fidelity insurance, property insurance, and trustee indemnity insurance.

Is trustee insurance required?

The Charity Commission has taken a hard stance on mismanagement of charities in recent years, and the legal costs involved with defending an allegation of wrongdoing or an investigation can be high.

Trustee indemnity insurance is important if you have a significant role within the organisation as a trustee, director, officer, or employee. The cover will provide financial protection if you face a compensation claim for a wrongful act e.g.: defamation, breach of duty, a health and safety claim.

Markel Direct’s trustee indemnity insurance covers:

  • Your legal liability as a governer, director, council member, officer, or trustee of the organisation
  • The defence of any legal action seeking your disqualification as a director
  • Any investigations you are requested to attend
  • Extradition proceedings (including appeals)

Find out more about charity insurance or call us today on 0800 640 6600.

Related articles

https://www.markeluk.com/charity-insurance/community-group-insurance/what-insurance-does-a-community-group-need

https://www.markeluk.com/charity-insurance/trustee-indemnity-liability-insurance/what-is-trustee-indemnity-insurance

https://www.markeluk.com/charity-insurance/charity-insurance-decision-tree

https://www.markeluk.com/articles/how-to-set-up-a-charity-step-by-step-guide

https://www.markeluk.com/articles/how-to-set-up-a-community-group

https://www.markeluk.com/charity-insurance/why-is-public-liability-insurance-so-important-for-charities

ARRANGE A CALLBACK

Charity insurance from £3 a month