Charity Structure: Company or CIO?

Charity structures: Incorporation

A charity may be ‘unincorporated’ or ‘incorporated’. An unincorporated charity does not have its own separate identity in law, which means that the people running the charity may have to repay personally any debts run up in the name of the charity, and it can be problematic for the charity to own property or sign contracts. An incorporated charity, by contrast, is seen by the law as a separate person and it can own property and sign contracts and – crucially – it can go bust without any of its debts being transferred to the individuals who manage it. In legal terms, the trustees of an incorporated charity have ‘limited liability’ for the charity’s debts (and usually that liability is zero in practice). The trustees of an unincorporated charity have unlimited personal liability.

Until 2013, it was common for charities to start life as unincorporated bodies, and move to incorporation as they matured and grew. However, a change in the law means that it is unlikely that in the future many people will choose an unincorporated structure for their charity.

Charitable Incorporated Organisation

The Charities Act 2006 introduced a new legal form for charities, the Charitable Incorporated Organisation or CIO. This is an alternative to the Company Limited by Guarantee (‘charitable company’) which was historically the most common structure for incorporated charities. After years of delay, the Charity Commission started registering CIOs in January 2013.

A charitable company is subject to dual registration and regulation, having to report to both Companies House and the Charity Commission. A CIO is registered and regulated exclusively by the Charity Commission. In that sense, the CIO is rather simpler to administer, with fewer requirements with regard to reporting, filing information etc, and fewer potential penalties for non-compliance.

The CIO provides full corporate status and limited liability, just like a limited company. It has rapidly become the most popular legal structure for new charities and will be the first choice for many. However, note that a CIO and a charitable company are not identical, and the charitable company will continue to have advantages in certain circumstances (discussed below).

Single Regulator

A charitable company is subject to dual registration and regulation, reporting to both Companies House (for company law purposes) and the Charity Commission (for charity law purposes). Registration as a company brings the benefits of limited liability and corporate status; registration as a charity confers tax privileges, relief from business rates, and fundraising advantages.

A practical advantage of the CIO, therefore, is that it avoids dual reporting requirements. A charitable company has to make returns to both Companies House and the Charity Commission; a CIO only reports to the Commission, thus reducing paperwork and administration.

A common problem occurs where a charitable company has made an amendment to its Articles of Association (= constitution) and files this amendment either with Companies House or the Commission, but not both. This creates a hazardous legal situation, as only one of the versions of the Articles will be lawful (it depends on circumstances which one this will be). If the group is working to the unlawful one, or sending it to funders etc, they can get into a terrible mess. The CIO avoids this common problem.

Small Charities

Normally an organisation with an income of less than ￡5,000 p.a. cannot register with the Charity Commission and thus obtain a charity registration number, which often hampers early fundraising efforts. An organisation with an income below this threshold can, however, register as a CIO, provided it can demonstrate basic viability.

Security for Borrowing

Social enterprise lenders often take a charge over the assets of companies to which they lend. A mortgage loan for property will be secured against the property which is to be purchased or built. A loan for general investment or running costs may be subject to a ‘fixed and floating charge’ where all the assets of the company are pledged as security to guarantee the repayment of the loan.

These mortgages and charges are filed with Companies House and are available to the public. This is so that the borrower can’t use the same assets to secure another loan from a different source; a potential lender will check the charges held at Companies House to see which assets are already pledged. There is no such register of charges for CIOs and some specialist lenders have already confirmed that this will be an issue for them. Thus a charitable company is very likely to be preferable if the charity envisages acquiring property against which it hopes to borrow money.

Speed of Registration

A charitable organisation with an income below ￡5k that is not a CIO may register for Gift Aid with HMRC, and this effectively identifies the organisation as a charity in law, though it doesn’t have quite the same status as ‘registered’ charity.

When we register a charitable company, it is a two-stage process. First, the company is registered at Companies House, which need only take a few weeks or even days; then the company applies to be registered with the Charity Commission. The organisation acquires its legal existence when registered by Companies House so it can start acquiring property, signing contracts, employing staff etc. During this time it is a limited company, though not a registered charity.

A CIO applies directly to the Charity Commission and doesn’t exist at all until it is registered by Commission. If – as is often the case – an application requires substantial correspondence and negotiation, the process can drag on for some considerable time. So the charitable company has the edge if speed of incorporation is an issue.

Register of Members

A company must make its register of members available for inspection by the public, which is an issue for some charitable companies. A CIO does not have to.

Other

Some other differences are:

• The members of any company, charitable or not, have a statutory right to remove any director by a simple majority vote at a general meeting, regardless of anything in the Articles or otherwise. (Directors of a charitable company are both ‘company directors’ and ‘charity trustees’.) Members of a CIO only have this right if it is enshrined in the constitution.
• A company must allow members to vote via a proxy at a general meeting; a CIO can choose to permit proxy voting, or not.
• A company must convene a general meeting if 5% of the members demand it. A CIO can include this rule in its constitution if it wishes, but it doesn’t have to.
• A company can amend its Articles by written resolution if 75% of the members indicate their approval. A CIO needs 100% of its members to approve a written resolution.

Governance Structures & Models

A CIO has to be registered with a constitution that enshrines either the ‘foundation’ or the ‘association’ structure–

• the foundation model where the only voting members will be the charity trustees
• the association model where there is a broader voting membership that elects all or some of the trustees

The Charity Commission has produced model constitutions for these two structures, and a majority of new CIOs are being registered with these models, downloaded from the Commission’s website. They are very legalistic and contain a bewildering number of cross-references.

The Charity Commission also produces a model constitution (Articles of Association) for a charitable company. This model assumes that the charity will have a membership which elects trustees at an AGM (equivalent to the CIO ‘association’ model). Many charitable companies do not operate like this, however, and instead, the trustees appoint their peers and successors rather than having them elected by a wider membership (the CIO ‘foundation’ model). The Commission’s model Articles of Association are not suited to this arrangement and therefore either they will need considerable editing or the charity will be run in a way that doesn’t reflect its registered rules.

In my view, none of the Commission’s models are particularly easy to read or use and I avoid them, preferring to draft each constitution or set of Articles to suit the group’s particular requirements.

Community Benefit Society

There is one other legal structure available to charities, the community benefit society, regulated by the Financial Conduct Authority. This incorporated structure is far less common than the others and is primarily used for community share issues. If you want information on this option please ask for a separate briefing paper to be sent to you.