What’s the Difference Between a Charity and a Not-for-Profit Organisation?

Introduction

Many people use the terms charity and not-for-profit as if they mean the same thing, but there are key differences between the two. Both types of organisations aim to make a positive social impact rather than generate profit for owners or shareholders. However, they operate under different legal structures, regulations, and obligations.

If you are thinking about starting a community initiative or a socially driven business, understanding these differences is crucial. This article explains how charities and not-for-profit organisations differ in purpose, structure, regulation, and tax treatment, helping you decide which best suits your goals.

What Is a Not-for-Profit Organisation?

A not-for-profit organisation (often called a non-profit) is any organisation that reinvests its surplus income back into achieving its goals rather than distributing it to owners or investors. The key idea is that the organisation exists for a social, community, or cultural purpose, not for personal financial gain.

Common examples include:

• Sports clubs and community groups

• Social enterprises

• Voluntary associations and cooperatives

• Arts, cultural, or educational groups

Not-for-profits can operate in many different legal forms, such as unincorporated associations, community interest companies (CICs), or companies limited by guarantee. They can trade, employ staff, and even make a profit, but that profit must always be used to further their aims rather than benefit individuals.

What Is a Charity?

A charity is a specific type of not-for-profit organisation that exists exclusively for charitable purposes defined by law. These purposes must provide a clear public benefit and fall within one of several categories set out by the Charities Act 2011, such as:

• Relief of poverty or hardship

• Advancement of education or religion

• Promotion of health, arts, culture, or community development

• Environmental protection or animal welfare

Charities must be registered with the Charity Commission in England and Wales (or the equivalent body in Scotland or Northern Ireland) if their income exceeds £5,000 per year. They are subject to strict regulations around governance, financial reporting, and public accountability.

Key Differences Between Charities and Not-for-Profit Organisations

Although all charities are not-for-profit, not all not-for-profits are charities. The main differences include purpose, registration, and regulation.

1. Purpose and Activities
Charities must exist for legally recognised charitable purposes and demonstrate that their work benefits the public. Not-for-profits, by contrast, can pursue broader social or community goals, including recreational or member-based activities.

For example, a football club that reinvests profits into equipment and training is a not-for-profit, but not a charity. However, an organisation providing free sports sessions to disadvantaged children could qualify as a charity because its aim is to benefit the wider public.

2. Regulation and Oversight
Charities are regulated by the Charity Commission, which monitors how they operate, ensures trustees act responsibly, and requires annual reports and accounts.

Not-for-profit organisations that are not registered charities are generally self-regulated, though they may still need to comply with company law, CIC regulations, or other governance rules depending on their structure.

3. Tax Benefits
Charities enjoy significant tax advantages, including:

• Exemption from Corporation Tax on most income

• Relief on business rates

• Gift Aid, allowing them to claim extra funds from donations

• Reduced VAT on some activities

Not-for-profits do not automatically qualify for these benefits, although certain structures like CICs can access limited reliefs or grants.

4. Public Accountability
Charities are expected to maintain high levels of transparency and public trust. They must publish annual reports and accounts, disclose trustee details, and show evidence of public benefit.

Most not-for-profits have fewer reporting requirements, especially smaller community groups, though good practice still encourages openness about how funds are used.

5. Governance and Trustees
Charities are overseen by trustees who hold legal responsibility for ensuring funds are used properly and the organisation follows its charitable objectives.

Not-for-profits can be run by directors, committees, or members depending on their structure. They have more flexibility in governance and can often make decisions more quickly, though they still need to follow their constitution or articles of association.

6. Fundraising and Donations
Charities can access a wider range of funding, including grants, trusts, and public donations supported by Gift Aid. Their registered status makes them more attractive to donors and funders.

Not-for-profits may rely on membership fees, trading income, or local fundraising events. While they can still receive grants or donations, they may find fewer opportunities because they do not have the same regulated charitable status.

Choosing Between a Charity and a Not-for-Profit

When deciding which structure is right for you, think about your organisation’s purpose, size, and future goals.

• Choose a charity if your aim is purely charitable and you plan to seek public donations or grants. It gives credibility and access to tax benefits but comes with stricter reporting obligations.

• Choose a not-for-profit if you want more flexibility, plan to trade commercially, or run a membership-based organisation where the benefits primarily serve participants rather than the general public.

You can also start as a not-for-profit and later register as a charity once your income grows or your activities meet the charity criteria.

Example Scenario

Imagine two friends who want to help improve their local community through sports.

• Option 1: Not-for-profit sports club. They form a community football club where members pay a small fee that covers costs like equipment and pitch hire. The club reinvests all surplus funds but mainly benefits its members. It remains a not-for-profit organisation.

• Option 2: Charity promoting youth inclusion. They create a free youth sports programme for disadvantaged children to improve health and social skills. Because the activity benefits the wider community and meets charitable purposes, it can register as a charity.

Both organisations serve good causes, but only one qualifies for charitable status under UK law.

Common Mistakes to Avoid

• Assuming that all not-for-profits automatically qualify as charities

• Failing to register with the Charity Commission when required

• Mixing personal and organisational funds

• Ignoring the reporting and governance requirements that apply to each structure

Before setting up, it is wise to take advice from an accountant or solicitor experienced in non-profit or charitable structures.

Conclusion

The main difference between a charity and a not-for-profit organisation lies in regulation and purpose. Charities are tightly regulated, must exist for recognised charitable objectives, and benefit from tax reliefs. Not-for-profits are broader, more flexible, and suitable for community or member-focused activities but receive fewer tax and funding advantages.

Both play vital roles in society, and the right choice depends on your mission, scale, and long-term plans. If you are unsure, seek professional advice to ensure your organisation is set up correctly from the start.