Not-For-Profit Company Formation: Our Guide

If you’re setting up as a not-for-profit but have a company structure, you can set up as a not-for-profit company (or a non-profit organisation).

So, where do you even begin? 

In this article, we’ll answer the following questions about not-for-profit companies:

• What legal structures are available for not-for-profits? 
• What actually is a not-for-profit company?
• Is a not-for-profit company the right legal structure to choose for your venture? 
• How does a not-for-profit company differ from a company limited by guarantee? 

Choosing The Right Legal Structure For Your Not-For-Profit

As with any organisation, you want to make sure you set up your not-for-profit correctly.

Choosing the right legal structure can be tricky, especially for NFPs!

There are various NFP structures, and the one you choose will really depend on what you’re doing as an organisation. For example, if you’re setting up a traditional NFP or charity, we’ve written about the most common options here.

Or, if you’re doing something new, and you’re setting up a social enterprise, we’ve written about how to navigate that space here.

When choosing the right structure for your NFP, you might want to ask yourself:

• Will I be running the organisation with a charitable purpose?
• What is my current budget?
• How much admin am I prepared to do for my structure?
• What am I trying to achieve with the structure?
• Where do I see my organisation in the future?

If none of the traditional or common structures really suit you, it might be worth considering setting up a NFP company.

What Is A NFP Company?

A NFP means an organisation that does not operate to make a profit. Rather, it may be driven by a special purpose such as a charitable one or a social cause. This could include:

• Cultural
• Educational
• Religious

For example, a charity is a NFP. This is because they work towards a charitable purpose without the goal of making a profit.

There are also Community Interest Companies (CIC), which are essentially organisations that operate for public benefit. In other words, their work is aimed at bettering the community.

There are certain registration processes to follow when setting up a NFP, so it’s important to familiarise yourself with these steps to ensure you’re doing it all right.

For instance, if you want to set up a charity, this would be regulated by The Charity Commission. However, if you’re setting up a CIC, this is regulated by Companies House.

There are, of course, other structures for you to choose from. You could choose to set up a Charitable Incorporated Organisation (CIO), which is essentially a charity, but without the need to register as a company with Companies House.

Each of these structures has its pros and cons, from tax concessions to the complexity of the registration process. So, it’s worth chatting to a lawyer who can assess your business goals and decide which structure is most suitable for you.

Is A NFP Company Right For Me?

To decide whether a NFP company is right for you, you need to ask yourself whether you are truly operating for a charitable purpose.

You should also consider whether you want to pay your members or directors. Under the NFP company structure, you won’t be allowed to do this. 

For example, you cannot pay fees to your directors for their services. They may, however, be able to claim reimbursements for costs such as travel expenses. And you can still employ your directors and pay them as employees.

So, if the requirements of a NFP company are inconsistent with your plans for your organisation, this might not be the right structure for you.

Otherwise, if you’re keen to move ahead with setting this up, you need to understand the requirements involved.

In any case, it’s a really good idea to speak with a lawyer to help you understand your options and what’s right for you.

How Is A NFP Company Different To A Company Limited by Guarantee?

Perhaps the most common structure for any organisation with a charitable structure is a Public Company Limited by Guarantee (CLG).

So, how is a CLG different from a NFP company? And why is it more common?

Going back to the basics, the main difference is that a NFP company is private whereas a CLG is public. This means that a NFP company can only attract private funding, while a CLG can attract public funding.

Additionally, there’s a difference when it comes to liability:

• A Pty Ltd company is limited by shares – this means that the members’ liability are only limited by how many shares they have in the company. 
• In a CLG, the members are limited by their guarantee—this is typically a nominal amount that members guarantee to pay if the company needs to wind up.

In any case, you can set up as either of these entities to run your NFP organisation (and both can be eligible for registration as a charity, too)—as long as you understand the different requirements and features of each structure, and whether it suits your organisation.

How Does A NFP Get Funding?

You might be asking yourself, ‘if a NFP doesn’t make a profit, how do they get funding?’

Generally, NFPs will receive funds through donations from the public, or money provided by trustees and founders. If they do make any profit, these will simply go back into the business to further their mission.

How Do I Set Up A NFP company?

If you’d like to set up a special purpose NFP company, you need to make sure you do it right.

When setting up a NFP company, there are two specific things you need to do.

1. Draft a tailored Company Constitution
2. Follow the correct registration process for your chosen structure

For Step 1, there are specific regulations that apply to NFP companies. Specifically, it’s required that your Constitution reflects that:

• You will only use the company’s income for a charitable purpose
• You won’t pay any fees to your members or directors
• Any fees (such as travel-related expenses) must be approved by all directors

After you do this, you also have to complete the correct registration process (such as the correct forms). You approach a lawyer to make sure you’re doing this right. 

What’s Next?

Now that you’ve set up your NFP company, there are other administrative tasks you’d typically have to do as a business. We always suggest speaking to an accountant to make sure you’re set up on that side of things. For example, we would suggest thinking about:

• A company bank account
• Claim Gift Aid (tax relief for charity donations)
• Insurance
• Sort out fundraising and donations

And, if you’re thinking about going down the charity route, you need to apply to the Charity Commission to be a registered charity.

If successful, the Charity Commission will be the main regulatory body you’ll be reporting to. However, you’ll need to speak to an accountant about tax implications such as claiming Gift Aid.

Speak To A Lawyer

If you need help understanding your options, or would like assistance with setting up your structure, we’re here to help!

It’s always a good idea to speak with an experienced lawyer who can walk you through your options and the various implications of a structure—especially if you want to get it right from the start.

You can reach out to our friendly team on 08081347754 or at [email protected] for a free, no-obligations consultation.

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