There’s a lot of confusion around the difference between a charity and a not-for-profit organisation. But before starting a charity, it’s important to understand the distinction between the two, as how you decide to structure your organisation could have a big impact on things such as tax treatment and regulation.
The key thing to remember is that while all charities are “non-profit,” this does not necessarily make them a “not-for-profit organisation”.
So on that confusing note, let’s look at the differences between a charity and a not-for-profit in the UK.
Disclaimer: This information was true and accurate to the best of our knowledge at the time of writing. Please visit the government website for full information about charity organisational structures and your legal obligations. Rules and regulations around charities and not-for-profits may differ by country and region.
Charity definition: What is a charity?
The basic definition of a charity is an organisation that is registered with The Charity Commission, and operates exclusively for charitable purposes.
a) The organisation must be established for a charitable purpose – so, for public benefit
b) The organisation must be subject to the High Courts’ charity law jurisdiction
One of the main benefits of registering as a charity is that you will be eligible for various tax exemptions, as charities do not pay tax on most types of income - such as donations or rental income. You can find out more about charity tax relief here.
To make matters even more confusing, it’s also worth noting that under the ‘charity’ umbrella, there are also various types of charity structures, and which one your organisation chooses will be based on a number of factors – for example, the need for limited liability for your board of trustees.
The four types of charity structure are:
Charitable incorporated organisation (CIO)
This is a charity that is only regulated by the Charity Commission, rather than both the charity commission and companies house (which would make it a ‘charitable company’ – read more below). One of the primary benefits of being a CIO instead of a charitable company is that trustees will benefit from limited-liability protection, meaning they will not be held personally liable if the charity falls into financial difficulty.
Charitable company (limited by guarantee)
The main thing to remember about a charitable company is that it will need to be registered with both Companies House and the Charity Commission. This gives the organisation the freedom to own property and transact business with third parties on its own behalf (without the need for trustees) – however, it’s worth noting that this also means the charity will be liable for its own debts.
This is when a group of people (two or more) work together towards a shared purpose for the benefit of the public, but are not a formal structure such as a charity or company. This could include organisations such as non-profit clubs and community groups.
A charitable trust is where a group of assets are assigned to a trustee (or board of trustees) who can control and use those assets (as well as any income they drive) to fund their charitable activities. Bear in mind there are also lots of different types of trust, so please visit the government website for more information.
Not-for-profit definition: What is a not-for-profit organisation?
A not-for-profit organisation is a catch-all term for organisations that are, unsurprisingly, not for profit - meaning that their activities are not for the financial benefit of any individual or board of directors.
However it’s important to remember that there are all sorts of not-for-profit organisations, as it’s not a legal structure in itself – so the key thing that differentiates a not-for-profit from a charity is whether the organisation is eligible to register as a charity with The Charity Commission.
The main benefit of being a not-for-profit organisation is that there are fewer restrictions on the charitable work you can carry out, as you will not have to work under the same restrictions as if you were registered with The Charity Commission.
What does this mean for my charity insurance?
Regardless of your organisation’s legal status, both charities and not-for-profits have a responsibility to their employees, volunteers and service users to protect their organisation’s assets and liabilities. This means that whether you’re a charity or not-for-profit, it’s still vital to have robust and appropriate charity insurance in place.
With over 30 years' experience and over 3,000 third sector customers in the UK, we work with market-leading insurers to provide competitive coverage, expert consultation and advice for charities, community groups and not-for-profit organisations.
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