What is a char­it­able or­gan­isa­tion? Defin­i­tion and types

The Merriam-Webster defin­i­tion of a charity as “an in­sti­tu­tion engaged in relief of the poor” is somewhat outdated. These days, charities can support many causes, from providing financial aid to those in need to sup­port­ing and spreading awareness for animal rights or en­vir­on­ment­al issues. In the UK, the Charities Act 2011 defines a charity in pub­lic­a­tion 2011 c. 25 as one that “is es­tab­lished for char­it­able purposes only.” The number of charities in the UK is vast, but what exactly is the dif­fer­ence between a non-profit and a charity? What is the dif­fer­ence between a public and a private charity? And how does a char­it­able or­gan­isa­tion compare to a found­a­tion? All these questions will be answered in the following.

Having es­tab­lished that a charity is an or­gan­isa­tion with al­tru­ist­ic goals, you may wonder what types of charity there are. At this point, it is also worth dis­cuss­ing the legal structure of a charity. A charity is a kind of non-profit or­gan­isa­tion. However, there are different types of non-profit or­gan­isa­tions covered in our dedicated article on non-profits. So, what is the dif­fer­ence between a charity and other non-profits?

De­term­in­ing whether your or­gan­isa­tion is a charity or another type of non-profit is important because there will be a dif­fer­ence in how the two types are taxed. The trick to knowing whether an or­gan­isa­tion is a true charity lies in the defin­i­tion of a charity. What is the aim of the or­gan­isa­tion? If you can answer this question by stating an aim that serves the greater good – such as an edu­ca­tion­al or religious purpose, for example – then the or­gan­isa­tion counts as a char­it­able one. Of course, you must be able to provide proof for this, but you can read more on how to start a charity here.

Generally speaking, charities can be clas­si­fied into two main forms: public charities and private found­a­tions or trusts. In the UK, a legal defin­i­tion for a ‘char­it­able found­a­tion’ does not exist. Although they share many sim­il­ar­it­ies, the key to their dis­tinc­tion lies in the way they gather funds for op­er­a­tion­al purposes. There’s also a dif­fer­ence in how the two operate. Private found­a­tions tend to hand out grants to in­di­vidu­als who meet some criteria set out by the found­a­tion. Charities, on the other hand, are more likely to act, such as providing cooked meals or en­ter­tain­ment for elderly people. This dis­tinc­tion is not a rule, however, but more of a general tendency. The defin­it­ive dif­fer­ence between a found­a­tion and a charity lies in the way they gather funds.

Private found­a­tions often collect their funds from a single key source, for example, a wealthy be­ne­fact­or. This may be a wealthy family who believes in the cause or a cor­por­a­tion that wants to give something back. As such, the funds of a private found­a­tion are con­trolled because they are dependent on a main source of income.

Public charities don’t rely on a single source of income. Instead, they depend on public donations or gov­ern­ment­al grants. You may have noticed how some hospitals and churches are re­gistered as charities. These or­gan­isa­tions rely on income from several sources, which is what gives them their status as a “public” charity. One of the dis­tin­guish­ing features of public charities then is their de­pend­ency on frequent donations from the public.

The dif­fer­ences between a found­a­tion and a charity can be sum­mar­ised as follows:

• A found­a­tion is usually created by a single entity and is funded by one main, private entity.
• A public charity depends on funds from the general public and the gov­ern­ment and puts these funds into action to support its cause.
• Found­a­tions and charities are more similar than different, but their dis­tinct­ive dif­fer­ence is how they are funded.

A charity will most likely have a board of directors who help run the activ­it­ies of a charity. This board will have a set of re­spons­ib­il­it­ies to ensure that the charity meets set ex­pect­a­tions. For example, one of the re­quire­ments for a charity is to have a clear aim and if that aim is not being put into action or is not evident enough in how the charity manifests, then the board of directors has a re­spons­ib­il­ity to fulfil this duty. A charity should also keep its members and the general public informed of any changes to its outlook and goals. This ensures that members and the general public have a trans­par­ent re­la­tion­ship to the entity they are sup­port­ing fin­an­cially. If there is a change in or­gan­isa­tion or activity, or indeed a change to its aim, some people may either choose to support it more or support it less. This re­la­tion­ship to the general public is one of the re­spons­ib­il­it­ies of a charity. A charity must also function as a non-profit or­gan­isa­tion in order to be a real charity. This means that it has financial re­spons­ib­il­it­ies to give back to the community that funds it.

Certain benefits to opting for a charity as a legal structure are seen as con­tro­ver­sial in the business world – par­tic­u­larly when it comes to tax relief. This is why charities are strictly monitored and it is important to take the re­spons­ib­il­it­ies of a charity seriously. There are several benefits to a charity as a business structure:

1. Tax Relief: Charities may be eligible for tax reliefs of different kinds, meaning they have more dis­pos­able funds to put into projects to fulfil their goals. It may be worth con­sult­ing a tax advisor when applying for tax exemption with the HMRC.
2. High Public Regard: Don’t listen to what other people think of you! The slogan may be true on a personal level, but in the business world it’s important to maintain a good re­la­tion­ship with the public and donors. By starting a charity, many people will recognise that you’re trying to do good in the world. In other words, charities are well-respected by those who support their cause.
3. Grant Eli­gib­il­ity: Your business’ status as a non-profit charity will mean that you’re eligible to apply for funding grants. This is not to be un­der­es­tim­ated because it will most likely be one of the main sources of funding for your charity.

Please note the legal dis­claim­er relating to this article.