Having decided that you wish to form a new charity with a corporate structure or perhaps transfer an existing charity to a corporate structure you have two options.
- A company limited by guarantee (“CLG”) which is a company without share capital. This has traditionally been the popular choice.
- A charitable incorporated organisation (“CIO”). This is a more recently introduced type of charity structure. A CIO is similar to a company. There are two different types: Foundation CIO’s and Association CIO’s. With a Foundation CIO the only voting members are the Trustees whereas with an Association CIO, the voting membership is much wider than the Trustees. The latter is usually more appropriate where the charity has a wide voting membership.
The main advantage of a charity corporate structure as opposed to a personal charitable trust is that being a separate legal entity it gives the members or trustees of the charity the benefit of limited liability and personal protection against the legal consequences of, for example, entering into contracts, holding property and employing staff.
Advantages and Disadvantages
The advantages and disadvantages of each type of structure can be summarised as follows:-
- A CLG has to register with both Companies House (“CH”) and the Charity Commission (“CC”). A CIO only has to register with the CC.
- CH charges fees. The CC does not charge fees.
- The Companies Act 2006 imposes various statutory and regulatory requirements upon a CLG including the requirement to file various reports. A CLG also has to file similar information with the CC which inevitably involves duplication and extra expense. A CIO is only required to report to the CC and file accounts and an annual return with them. A CIO does not have to report to CH.
- A CIO which has a gross income of less than £250,000 in a financial year can use a simpler receipts and payments basis to prepare its accounts. This option is unavailable to a CLG.
- A CLG has to have a minimum income of £5000 for it to also register with the CC. A CIO has no minimum registration threshold.
- At commencement of the registration process, a CIO is given a registered charity number which can help when corresponding with HMRC regarding charitable tax advantages and can also help when approaching potential donors and funders.
- The set-up costs and ongoing administration costs of a CIO are almost certainly going to be less than those of a CLG.
- It can take several months for the CC to process an application for registration, sometimes longer depending upon what issues are raised. A CLG on the other hand can be incorporated very quickly within a matter of days although the registration process with the CC is likely to be the same as for a CIO.
- A CIO does not exist until it is registered with the CC and its details are entered in the Register of Charities. A CLG exists from its date of incorporation.
- A CIO ceases to exist if it loses its registration at the CC. A CLG on the other hand only ceases to exist when it is struck off the register at CH.
- The CIO structure is relatively new and can be unfamiliar to funders and donors.
- It is possible that a CIO will be unable to take on secured borrowing because the regulations make no provision for the keeping of a register of charges. Whereas CH maintain a searchable register of charges relating to all companies including a CLG.
Which is the right structure for you?
As a very general rule of thumb the CIO structure (Foundation or Association) will appeal to a medium size charity which for example employs staff and enters into contracts. On the other hand, a CLG may be more appropriate for a large charity which may wish to enter into secured borrowing arrangements. It is also worth remembering that it should be possible to convert from a CIO to a CLG at a later date if for example a need to borrow arises. It is a matter of taking all the advantages and disadvantages into consideration bearing in mind the anticipated future activities and aims of the charity.
If you require further advice regarding the structure of a charitable organisation then Talk to Tollers. We have a dedicated legal team who can work with you and your Charity’s requirements.
The new guidance Conflicts of interest: a guide for charity trustees (CC29) aims to improve trustees’ understanding of this complex area and give guidance on what is expected of charities of all sizes.
The guidance covers direct conflicts between trustees’ personal interests and those of their charity, conflicts arising because they are connected to a particular person or matter, and conflicts because they stand to profit from a particular decision or because of ‘insider’ knowledge they hold.
The guidance focuses on preventing conflicts from arising, including considering potential conflicts before trustees are appointed, and for trustees to identify and declare conflicts. The key principles to follow are set out as ‘identify, prevent and record’.
- Charities should review their conflicts policies, their new trustee induction processes and their procedures at trustees’ meetings for flushing out and declaring conflicts.
- Download Conflicts of interest: a guide for charity trustees from the Charity Commission website.