What is the difference between nonprofit and charity?
To clear up any confusion, let's examine the difference between a charity and a non-profit in the UK.
Definition of charity: What is a charity?
An organisation registered with the charity commission and operated exclusively for charitable purposes is a charity.
To register with the charity commission, an organisation must meet the following criteria:
a) The organisation must be established for a charitable purpose - that is, for the benefit of the public
b) The High Courts must exercise charity law jurisdiction
You can benefit from various tax exemptions when you register as a charity since charities do not pay taxes on most types of income, such as donations or rental income. It's also worth mentioning that various kinds of charity structures exist under the "charity" umbrella. Your organisation will choose one based on multiple factors, such as the need for limited liability for trustees.
There are four types of charity structures:
A charitable incorporated organisation (CIO)
As opposed to being regulated by the charity commission and Companies House (which would make it a 'charitable company'), this charity is only held by the charity commission. In addition, being a CIO rather than a charity company has the primary advantage of granting trustees limited-liability protection, meaning they won't be personally liable if the charity becomes financially unstable.
An organisation with a charitable purpose (limited by guarantee)
The main thing to remember about a charitable company is that it must be registered with the charity commission and Companies House.
Without trustees, the organisation can own its property and transact business with third parties (without relying on trustees), which means the charity will be responsible for its debts.
Unincorporated association
People work together (two or more) to accomplish a charitable purpose for the benefit of the general public without forming a formal enterprise like a charity or organisation. For example, a community group or a non-profit organisation might fall into this category.
Trust
There is a charitable trust where a group of assets is assigned to a trustee (or board of trustees) who can use those assets (as well as any income they generate) to support charitable activities. In addition, there are many different types of trusts, so please check out the government's website for more information.
Charity taxes & donations
As defined by the Charity Commission for England and Wales, a charity is an organisation established for charitable purposes and governed by High Court charity law. Additionally, it must provide a public benefit, either broadly or to a sufficiently large segment of the population.
Charity income exceeding £5,000 a year requires registration with the Charity Commission (England and Wales). Your organisation, however, will not be considered a charity if it combines charitable and non-charitable purposes.
Source: https://www.gov.uk/government/publications/what-makes-a-charity-cc4/what-makes-a-charity-cc4
The purpose of charity
Purposes
'Purpose' refers to what your organisation is set up to accomplish.
The purpose of a charity is usually described in its governing document (the legal document that creates the charity and describes how it should be run).
Having charitable purposes is a legal requirement for being a charity. A charitable organisation cannot have some charitable purposes and some non-charitable ones.
Purposes of charity
A 'charitable purpose' (as defined in the Charities Act) must meet the following requirements:
● Described in the Charities Act as charitable purposes
● 'Public benefit requirement' - be for the public good
● The purpose of an organisation must satisfy both criteria to be considered charitable. It must be clear what the purpose is so that the court can enforce it if necessary.
There might not be a clear purpose:
● The purpose of the governing document is unclear due to unclear wording
● This purpose is unclear in scope and meaning
In the absence of certainty, a purpose cannot be charitable because it is unclear that it:
● Meets one or more of the purposes listed
● The purpose of the project is to benefit the public
● Charitable purposes that cannot be pursued
The purpose of your organisation cannot be charitable if:
Is not in accordance with the descriptions of purposes, and is not for the public benefit, including:
● The purpose of politics
● In violation of public policy or unlawful
● Designed to serve a non-charitable purpose
Source: https://www.gov.uk/government/publications/what-makes-a-charity-cc4/what-makes-a-charity-cc4
What is a non-profit organisation?
The term "non-profit organisation" refers to organisations that are, naturally, not for profit - that is, their activities are not intended for their individual or board members' financial gain.
It's important to remember that there are many types of not-for-profit organisations because there's no legal structure in and of itself. So, the main difference between a non-profit and a charity is whether or not the organisation is registered with the charity commission.
You can carry out charitable work with fewer restrictions as a not-for-profit organisation since you do not have to follow the same restrictions as a charity registered with the charity commission.
How charity insurance differs
It is the responsibility of all charities and non-profits to protect their assets and resources. The charity insurance will cover your organisation's assets, possessions, money, and reputation, so choose wisely.
Charities and non-profit organisations should purchase public liability insurance. This is especially important when your charity interacts with public members at events like fundraisers. Without this liability insurance, you won't be covered for the legal costs of defending a liability claim. A fundraiser attendee can, for example, claim if they:
● Getting injured by tripping on wet flooring is particularly foreseeable if the hazard was reasonably foreseeable (and the organisers could have arranged to dry the floor if it soaked for some time).
● As the venue is damaged (if this was foreseeable), suffer bodily injury.
Differences between Nonprofit and Charity
Affiliations
A non-profit organisation can operate for various reasons, including charitable donations, pleasure, recreation, welfare, and civic improvement. Charities, on the other hand, operate exclusively for charitable purposes.
Nature
Nonprofits are not all charities, but charities are all non-profit.
Budget requirements
The spending requirements set by charities are different from those of non-profits.
Receipts for donations
A non-profit cannot issue official receipts for donations. Therefore, they cannot claim tax credits. Alternatively, a charity may issue official receipts for donations to qualify for income tax deductions.
How does this affect your charity insurance?
Regardless of your legal status, charities and not-for-profits are responsible for protecting their assets and liabilities to provide quality services to your employees and volunteers. Therefore, whether your organisation is a non-profit or a charity, it still requires full and appropriate charity insurance.
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The bottom line
The term "non-profit" includes many different types of organisations, and charities constitute only one type of non-profit. Tax authorities define a non-profit as a public charity if it earns a substantial part of its income from the general solicitation. In the UK, however, non-profit organisations must register as charities if they solicit public donations. However, private charitable foundations qualify as charities without soliciting contributions.
What are the criteria for determining whether a non-profit is a charity? Generally, the answer to this question can be found in the organisation's mission statement. Most non-profits are classified as charities if their purpose is educational or religious, they provide funds or services to support medical research, or they promote a cause that benefits the general public.