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How to become a not for profit provider
Our partner, Royds Withy King, shared with us what a 'non' profit provider' means and what structures a not-for-profit organisation can take. You can download the factsheet here.
Alternatively, you can read the article below:
Whilst the majority* of care home providers in the UK are privately owned it is possible for a different approach to this to be taken – i.e. “not for profit” ownership. “Not for profit” does not mean that the business should not generate profit. Profits will be invested back into the business as opposed to being distributed to its stakeholders. One of the most important decisions to make when setting up a new service (or taking over an existing one) is the structure of the ownership. There are many considerations that flow into this; including risk and liability, decision-making and who the key stakeholders will be.
What structure can a not for profit organisation take?
Charitable Incorporated Organisation (CIO)
A CIO has a separate legal personality (meaning it can own assets and property in its own name). The liability of the members and trustees is limited to a specified amount, which makes it an attractive option. As a charity, it must register with the Charity Commission and have charitable objects but will benefit from certain tax exemptions available to charities. There are two different forms that CIOs can take:
1. “Foundation” (members and charity trustees can be interchangeable but there is no wider membership
2. “Association” (trustee board with separate voting membership).
The Charity Commission produces governing documents for both forms which makes things relatively straightforward when registering. Another advantage is that there is no requirement for a CIO to be registered at Companies House, reducing the need for filing documents with both Companies House and the Charity Commission. The main disadvantage is that a CIO cannot have a charges register so secured borrowing is not possible from banks or lenders.
Company limited by guarantee
This structure is similar to a CIO but does not have the benefit of single registration with the Charity Commission. It is available to both charities and non-charities. As a result, since the launch of the CIO, most charitable companies will incorporate as a CIO. This option does however provide the benefit of limited liability where charitable status cannot be obtained. The main disadvantage is that it needs to be registered at Companies House as well as the Charity Commission, doubling the paperwork required on an annual basis.
Community Interest Company (CIC)
A CIC is another form of company limited by guarantee. It does not have charitable status. It can be set up as a newly incorporated company or an existing company can be converted into a CIC. CICs are regulated by the “Regulator of Community Interest Companies” and an application needs to be made to Companies House after which it will be automatically sent to this regulator. Its governing document will need to contain a “community interest statement” which sets out the activities the business wants to undertake, how (and which) community will benefit. An “asset lock” must be included which prevents the assets of the company from being used for private gain rather than the
stated objects of the organisation.
More information about CICs can be found on the regulator’s website here.
What are the benefits of a not for profit structure?
• More freedom? It is arguable that without the need to satisfy returns for private investors, a not for profit organisation has more freedom and flexibility to invest surplus cash back into the service, ensuring that the care provided is to a high standard
- Staffing – not for profit organisations tend to attract and be able to offer more opportunities for volunteers than the private sector. This can be very useful when bolstering staff numbers, although as with all staff in the care sector, stringent checks are required before engaging volunteers
- Public recognition and trust – operating as a not for profit organisation can be a way of genuinely generating business from potential service users and funders who are attracted by the ethos and principles of the organisation. This is particularly so for charities
- Tax Reliefs – where charitable status can be acquired, there are various tax reliefs (business rates, reduced corporation tax, gift aid) and potential grants which can be accessed to assist with funding
What are the disadvantages?
- Funding – obtaining funding can be difficult for not for profit organisations at any time and has been particularly exacerbated by COVID-19. As described above, some structures cannot obtain secured lending and careful consideration need to be given to cashflow, funding streams and sustainability when choosing a structure
- Unpaid Board – it is often the case (and always the case with charities) that the board of not for profit organisations are unpaid. The time commitment and potential legal liability that comes with the role can make it difficult to recruit
- Regulation – for both charities and CICs, there are significant restrictions on how the organisation can operate. This is particularly so for charities which are highly regulated by charities legislation
In summary, when considering whether to operate as a not for profit organisation it’s vital to take a step back and give full consideration to what you want to achieve and how you will do so, taking into account all aspects of your plan including financial viability, staffing, regulation and governance. It is vital to invest in professional advice to ensure that you are pursing the right route for you and your business
*According to an article in The Independent “Care Home Operators accused of extracting disgusting profit” (2019) 13% of the market is
owned by not-for-profit other 81% private ownership and 6% councils or NHS owned
*All information is correct at the time of publishing. Use of this material is subject to your acceptance of our terms and conditions.