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Pros and cons of becoming a charity wiki
Benefits and disadvantages of becoming a charity
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Charitable status has the following advantages.
Public recognition and trust
Charities are widely recognised as existing for social good. This can assist with fundraising.
A lock on assets
Organisations with charitable status are prevented from using their assets for any purpose other than to pursue their charitable objects. This means that the assets of a charity can never be used for other purposes or for private benefit.
Charities benefit from a variety of tax reliefs including:
- no corporation tax on profits made from trading in the course of delivering their charitable aims (primary purpose trading)
- 80% mandatory and 20% discretionary relief from business rates (rate relief)
- Gift aid on cash donations from individuals
- Stamp duty land tax relief on acquisitions of freehold property or entering into leases
Certain sources of grant funding are only open to organisations with charitable status.
Restrictions and requirements
Charities may face restrictions on the type of work that can be carried out or funded by them. For example, political activities and trading are both types of work which are subject to particular restrictions. Charitable status also means that the organisation must comply with administrative regulatory requirements including those relating to the preparation of annual accounts and returns.
The Charity Commission's information on registration provides further information on the restrictions and requirements.
Individuals on the board of a charity (often called trustees) must be unpaid unless the constitution of that charity or the Charity Commission permits payment. In general, payment of directors for particular services (e.g. the payment of a counsellor who happened to be a director to provide counselling services) is not a problem but the Charity Commission will want a detailed explanation before it will allow a charity to include in its constitution a provision allowing payment of trustees for being trustees.
This feature of charitable status can mean that it does not appeal to founders of organisations who need to receive a salary for the work they do but want to retain control. A founder who becomes a charity chief executive will receive a salary as an employee of the charity but can be dismissed by its board. A founder who sits on a board of charity is usually unpaid and, in any event shares control and responsibility equally with all the other members of the board.
For more information about payment of trustees see the Charity Commission's publication CC11 Trustee Expenses and Payments.
No equity investment
Charities cannot raise equity investment. But it should be remembered that, for many organisations these 'disadvantages' are seen as advantages.
While charitable status brings HMRC tax advantages as above, there are restrictions in terms of what input VAT can be reclaimed.
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