Published May 2012
When it comes to setting up and managing a charity, there are a number of different legal structures which may be used.
Serious consideration must be given as to the most appropriate vehicle for the charity, whether it be a brand new charity being formed from scratch or an existing charity. Issues, such as the implications for trustees and/or members, who may be bearing personal liability for the affairs and transactions of the charity, and the level of regulation and administration are all reasons to consider the charity’s legal structure.
The more traditional methods of setting up a charity have been to create a trust or an unincorporated association. Neither of these structures, have a separate legal identity, leaving trustees or agents of the members (respectively) exposed to personal liability, for such things as, liabilities under contracts entered into on behalf of the charity. Property will also need to be held in the name of specific individuals, rather than in the charity’s name, also imposing personal liability and onerous responsibilities on such individuals.
Many charities are now being set up or converted to legal structures with their own legal identity and limited liability. These include Industrial and Provident Societies and Charitable Corporations, but most commonly, charitable companies.
Most charitable companies are set up as companies limited by guarantee, meaning that there are no shareholders who have invested share capital for a specific number of shares, but rather there are members, who give a guarantee to contribute a certain amount of money (for example £1.00 each) to the company should it be wound up.
As with any other company, decisions will either be made at board level, by a board resolution, or by way of a resolution of the members either at general meeting or by written resolution. The charity’s constitution will consist of the company’s Articles of Association, although such Articles may provide that the charity shall be managed on a day to day basis in accordance with a separate set of rules of governance. The directors of a charitable company are effectively the charity “trustees”.
As companies have their own legal identity, they can enter into contracts, hold property and borrow money.
New structure available
A new structure for charities, which is in the process of being implemented, is the Charitable Incorporated Organisation (CIO).
CIOs were created by provisions in the Charities Act 2006, now consolidated into the Charities Act 2011, which came into force on 14 March 2012. They were created in response to requests from charities for a new structure which could provide some of the benefits of being a company, without some of the burdens.
They are a new incorporated structure, designed specifically for charities and will be an alternative legal structure for a charity to adopt. Implementation of the CIO is to be phased with new organisations being among the first to be able to register as CIOs and existing charitable companies able to convert to CIOs towards the end of the implementation period. Implementation is currently expected to start this year.
A CIO must be registered with and regulated by the Charity Commission but, unlike charitable companies, CIOs will not also be registered with and regulated by the Registrar of Companies. This single registration and regulation is intended to reduce regulation and administration for many charities.
Like any corporate structure, CIOs will have a separate legal identity allowing them to enter into contracts, to hold property in their own name, and to benefit from reduced personal liability for their trustees and members. As regards issuing security for monies borrowed, it is unclear at this stage whether there will be a register of charges, held by the Charity Commission, which will have the effect of regulating the priority of charges.
It will be relatively straightforward for a charity, which already has its own legal identity, such as a charitable company or a charitable industrial and provident society, to convert to a CIO.
Significantly, the CIO will not be a new corporate body to which the charitable company or society is transferred. The existing corporate body will simply need to be re-registered as a CIO. This conversion process will therefore not affect the contractual relationships of the charity or its legal personality.
For other, unincorporated forms of charities wishing to convert to a CIO (e.g. trusts and unincorporated associations), the procedure is less straightforward. Such charities will first have to set up a CIO, transfer the assets of the unincorporated association to the CIO, dissolve the unincorporated charity and then have the unincorporated charity removed from the register of charities at the Charity Commission.
Every CIO’s constitution must be in a form which accords with regulations made by the Charity Commission, or as near to that form as the circumstances allow. Charities wishing to set up a CIO will be able to comply with this by adopting a model form of constitution, which will be provided by the Charity Commission.
Despite the comparative lack of regulation and administration involved in running an unincorporated form of charity, the fact that incorporated status has the benefit of largely safeguarding trustees and members from the financial liabilities of the charity does make incorporation an attractive prospect, particularly in the current economic climate.
Regulations relating to CIO’s are still being finalised but it is looking like these could be a preferable structure for many charities, particularly those who want to avoid the risks of personal liability associated with unincorporated structures, but also avoid the additional regulation and administration that having a charitable company can bring. Having said this, charitable companies will still remain the preferable option for some charities, particularly larger charities and those who have issued, or still wish to issue charges and debentures.
We can offer advice to all sizes of charity as to the best legal structure for them, whether they are just setting up or whether they are looking to convert to an incorporated structure. We can also assist with all of the procedural elements of such set up or conversion.