It seems evident that non-profit organizations differ from profit-making ones, but this also influences how they handle and report on their finances. It can rapidly become confusing, so a good place to start is by looking at the various sorts of charitable organizations that exist.

How are non-profit organizations distinct from businesses?

Charities, not-for-profits, and Community Interest Companies differ from businesses in that they are typically established to address specific issues rather than simply make a profit. Understanding an organization’s goals enables decision-makers to make the best decisions to achieve them.

This means that the trustees of a charity established to distribute audiobooks are unlikely to decide to organize a cycling race one day unless it helps them achieve their goals. A typical business can be far more adaptable if its owners want it to be. It’s an extremely essential subject because the goals of an organization frequently affect how it is formed.

Are charities and non-profit organizations the same?

While the terms are frequently considered synonymous, not-for-profit organizations typically do not have a charity status. A registered charity must follow the Charity Commission’s rules and regulations, but a not-for-profit does not have the same constraints.

A registered charity is always a nonprofit organization. Not every non-profit organization qualifies as a registered charity. What exactly is a non-profit organization?.

What is a non-profit organization?

The word ‘not-for-profit’ refers to any organization formed to address a public-interest issue. In summary, their operations serve the larger community rather than a single individual or group of stockholders.

They are frequently established to carry out a project or ongoing solution, such as providing artistic facilities for local residents, sports groups for children, or operating a food bank for those in need.

When we talk about not-for-profits, we are referring to organizations that do not follow the same ideas of producing money for their owners as businesses do. For example, a typical limited corporation may decide to operate as a not-for-profit organization, and instead of paying dividends to shareholders from the firm’s revenues, any profits will be used to help it accomplish its philanthropic goals.

Larger corporations frequently establish and sponsor non-profit organizations as a benevolent arm, channeling donations through a subsidiary that is under their control but not monitored by the Charity Commission.

What precisely is a Community Interest Company?

A Community Interest Company (CIC) is a limited company with extra features (and reporting requirements!). They exist to carry out activities that benefit the community or a certain subsector.

CICs, also known as Public Benefit Entities (PBEs) in accounting, are free to make a profit and conduct business as usual as long as they meet their objectives. Shareholders can also get dividends, although they are capped:

In a Community Interest Company, shareholder dividends can be paid out up to 35% of profits.

A CIC must use 65% of its profits for community purposes. Are Community Interest Companies identical to charities?

No, CICs are not equivalent to registered charities. An organization can only be a charity or a community interest company, not both. As a result, CICs are not required to follow the Charity Commission rules.

Their goals can be much broader than those of a charity, allowing them to be established to raise funds for charities. Charities frequently establish subsidiary CICs to manage their economic activities or for related tasks such as lobbying while the charity achieves its goals. Sometimes, CICs are formed as joint ventures between nonprofits and public agencies to achieve mutually beneficial goals.

Do charities, community interest companies, and not-for-profits file tax returns?The structure of an organization usually determines its reporting requirements. A smart place to start is to see if the organization is a registered charity.

An organization that is not a registered charity must submit a tax return.

If the organization is a registered charity, it will only need to submit a tax return if it received income that is not eligible for tax relief.

If an organization is required to file a tax return, the type of return it submits is determined by its legal structure. For example, community interest firms, normal firms that are not-for-profit, and charities established as a limited company or unincorporated organization must file company tax returns. A charity established as a trust must file a Trust and Estate Self Assessment tax return.

Additional reporting requirements may apply based on the type of organization. For example, if a registered charity’s income exceeds £10,000, it must file an annual return with the Charity Commission. A Community Interest Company is also required to submit distinct reports.

What records must nonprofit organizations keep?

Accounting records must be kept by all organizations, regardless of their purpose or structure. Most businesses follow Financial Reporting Standards (FRS). These vary according to the size and type of the firm, but registered charities have completely different standards.

The Statement of Recommended Practice (SORP) is a reporting guideline used by registered charities to report on their operations. It recognizes that charities are fundamentally different from for-profit businesses, which has a natural impact on reporting obligations.

In summary, if the organization is a registered charity, it must follow the Statement of Recommended Practice (SORP). The Financial Reporting Standards (FRS) can be used by anyone.

Showing what the money is for.

The main distinction between a limited company and a non-profit or charity is that the former can use their earnings as they see fit, while the latter may have a general understanding of how the funds will be used.

When local governments or grant-making organizations such as the Arts Council or the National Lottery distribute money, it is usually for a stated reason. The organization that receives it is unable to use the funds for another purpose. Money allocated for a specific purpose, known as restricted funds,’ must be kept separate and reported on.

For example, a charity could apply to the National Lottery for funding to provide five-a-side football training for underprivileged children. They would not be able to use some of it to construct a new office.

This means that, at the absolute least, a non-profit organization must be able to categorize income as restricted or unrestricted.

Read Also: Do I need to pay tax on my side-hustle hobby business?

Accounting for expenses in charitable organizations.

When donors contribute money for projects, they will occasionally ask that the not-for-profit report on what it was used for. This means that a not-for-profit spending cash to offer services will also require a way to allocate expenses to specific initiatives so that they can report on them later.

The cost of having individuals work on the project will also need to be added in, as will the cost of any admin staff supporting it, for example. This may actually grow pretty sophisticated and time-consuming, and we often find that it can be difficult for smaller organizations to achieve.

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Note: It must be noted that the information provided in all our blogs are solely for the awareness purposes and are designed with the intention to create an ease for the reader to understand the rules and their importance. However, it should never be considered as an ultimate replication of rules. RezEx Accountants (RezEx Ltd) does not own any responsibility for any unpleasant event that may arise due to misinterpretation of a specific part or whole of the information.