Pros and cons of becoming a charity wiki
Benefits and disadvantages of becoming a charity
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 cannot use assets for any purpose other than the pursuit of charitable objectives. The assets of a charity can never be used for private benefit.
- Tax relief
Charities benefit from a variety of tax reliefs including:
- exemption from corporation tax on profits from trading undertaken in the course of charitable provision (primary purpose trading)
- 80 per cent mandatory, and 20 per cent discretionary, relief from business rates (rate relief)
- Gift Aid relief on donations from individuals
- Stamp duty land tax relief on freehold property and leases acquired for charitable purposes.
Certain sources of grant funding are open only to organisations with charitable status.
- Restrictions and requirements
Charities may face restrictions on work that can be carried out or funded. Certain political activities and types of trading are subject to restrictions. Organisations with charitable status must comply with regulatory requirements, including those relating to preparation of annual accounts and returns.
The Charity Commission's information on registration provides further information on restrictions and requirements.
- Unpaid board
Individuals on the board of a charity, often referred to as trustees, must not be unpaid unless the constitution of a charity, and the Charity Commission, authorise it. Although payment of trustees for the supply of professional services is not prohibited, the Charity Commission will require detailed explanation before it will allow payment of trustees. The power to pay trustees must be included in a charity’s constitution or governing document.
This may mean charitable status does not appeal to founders of organisations who want to receive a salary and retain control. A founder who is a charity chief executive will receive a salary as an employee of the charity and can be dismissed by its board. A founder who sits on a board of a charity is usually unpaid and shares control and responsibility equally with all trustees.
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. It should be remembered that, for many organisations these disadvantages are seen as advantages.
While charitable status brings HMRC tax advantages, there are restrictions on VAT claims.
Find out more about legal forms.