A not-for-profit organisation is a body that exists to pursue a purpose, such as a social, charitable, community or membership purpose, rather than to make profits for its owners. Any surplus it generates is reinvested in that purpose instead of being paid out to private owners. "Not-for-profit" is a description, not a legal form. In the UK it covers several distinct legal structures: charities (including CIOs and charitable companies), community interest companies, companies limited by guarantee, community benefit and co-operative societies and unincorporated associations. Each has different rules on registration, liability and tax.
Not-for-profit does not mean no surplus
The most common misunderstanding is that a not-for-profit cannot make money. It can, and a well-run one usually should: surpluses build reserves, fund growth and absorb bad years. Staff can be paid market salaries. The defining feature is where the surplus goes. It stays in the organisation, or goes to its beneficiaries or community, instead of being distributed to shareholders. The related terms "non-profit sector", "third sector", "voluntary sector" and "charity sector" are used loosely for the same group of organisations. Charities are only one part of it.
The main UK legal forms
| Form | Registered with | Limited liability? | Key feature |
|---|---|---|---|
| Charitable company (limited by guarantee) | Companies House and the Charity Commission | Yes | Charity tax reliefs; must also follow company law |
| Charitable incorporated organisation (CIO) | Charity Commission only | Yes | Must register as a charity whatever its income |
| Charitable trust or unincorporated charitable association | Charity Commission if income is over £5,000 | No | Simple to set up; trustees or members carry the risk |
| Community interest company (CIC) | Companies House, approved by the CIC Regulator | Yes | Asset lock; may pay capped dividends; not a charity |
| Company limited by guarantee (non-charitable) | Companies House | Yes | No shareholders; non-profit status depends on its articles |
| Community benefit or co-operative society | Financial Conduct Authority | Yes | At least 3 members; run for the community or its members |
| Unincorporated association | None | No | Clubs and voluntary groups; free to set up |
Charities
In England and Wales, a charity is an institution "established for charitable purposes only" that falls under the High Court's charity jurisdiction (section 1 of the Charities Act 2011). Its purposes must fall within the 13 descriptions listed in section 3, such as relief of poverty, education, health and environmental protection, and must be for the public benefit. Unless it is exempt or excepted, a charity must register with the Charity Commission once its gross income exceeds £5,000. A CIO must register whatever its income, because registration is what creates it. Different rules apply in Scotland and Northern Ireland.
Charity status brings the most generous tax treatment. HMRC-recognised charities pay no tax on most income and gains used for charitable purposes, can claim Gift Aid on donations, and receive an 80% discount on business rates. Tax is still due on money spent on non-charitable purposes.
Community interest companies
A CIC is a limited company, limited by shares or by guarantee, that passes the community interest test: a reasonable person might consider its activities are carried on for the benefit of the community. It must have an asset lock, which stops its assets being used for private gain. A CIC limited by shares may pay dividends, but total dividends are capped at 35% of distributable profits. The law expressly provides that a CIC is not a charity, even if its purposes are charitable. It therefore pays corporation tax like any other company and gets no charity reliefs. Our guide to community interest companies covers the CIC form in more detail.
Societies, guarantee companies and unincorporated associations
- Community benefit society. Registered by the FCA under the Co-operative and Community Benefit Societies Act 2014. Its business must be conducted for the benefit of the community, and it needs at least three members. A co-operative society must instead show that it is a bona fide co-operative;
- Company limited by guarantee. Members' liability is limited to the amount they undertake to contribute if the company is wound up, usually a nominal sum, instead of holding shares. This is the usual form for membership bodies and trade associations. Being "non-profit" depends on the articles prohibiting distributions, and it does not by itself bring any tax exemption;
- Unincorporated association. An agreement between people who come together for a reason other than profit, such as a sports club or voluntary group. It needs no registration, but members are personally responsible for its debts. For tax purposes it is a "company", so any taxable profit is subject to corporation tax.
Choosing a structure
The choice comes down to three questions. Do you need charity tax reliefs and Gift Aid? If so, you need a charity. Do you want the option of outside investors or paying a return to members? That points to a CIC limited by shares or a society. How much personal risk are the founders willing to take? That points away from unincorporated forms once the organisation employs staff, signs leases or holds significant funds. Whatever the form, the accounting obligations follow from it. Our guide to not-for-profit accounting covers fund accounting, the Charities SORP and audit thresholds.
Primary sources: Charities Act 2011; Companies (Audit, Investigations and Community Enterprise) Act 2004, Part 2; Co-operative and Community Benefit Societies Act 2014, section 2; GOV.UK guidance on setting up a charity, charities and tax and unincorporated associations.
Acumon works across the sector. Our charity accountants and CIC accounts teams can help you choose a structure and keep it compliant once it is running.