Charity Formations

We are often asked what are the main types of charity and the advantages and disadvantages relating to these so we have set these out in the article below.  This is not intended to be a summary of all of the options and there are other ways that Charities can be constituted, however this article covers the main options.

If you require further information please contact our specialist charity team.

Current Legal Forms

  • Unincorporated Association
  • Company (limited by guarantee)
  • Charitable Incorporated Organisation (CIO)

Unincorporated Association

Advantages:

  • Minimal administration
  • Governed by Charity Commission & Charity Acts only.

Disadvantages:

  • Cannot enter into contracts in its own name; the Committee members must enter into contracts on its behalf. As such, those Committee members that enter into the contracts are personally liable under those contracts.
  • If an unincorporated association is sued or incurs liabilities, the trustees are jointly and severally liable (i.e. each is liable for the whole debt to the extent that it is not satisfied by the others).
  • The trustees will normally be entitled to an indemnity, meaning that if they incur liability, then they can be reimbursed out of trust property (providing the liability is properly incurred), but if the trust property is insufficient or the debt was not properly incurred, then the trustees may be required to pay the debt themselves. Insurance may cover the liability in cases of negligence, but to the extent that there is a shortfall or the policy is declared voidable by the insurance company, the trustees are personally liable.

Company Limited by Guarantee

Advantages:

  • By becoming a company limited by guarantee the charity is separate legal entity, distinct from its members and directors.  Any contracts are signed in the name of the company. It is easier for people dealing with an incorporated body to assess the credit risk of doing so.
  • The trustees would become directors of the company. As agents of the company, the directors are not normally personally liable for its debts or for negligence. (A director may be liable to the company, however, for example, if he/she acts in breach of trust or duty to the company or is responsible for fraudulent or wrongful trading by the company. He/she may also be liable under charity law if he/she is found to have acted unreasonably or fraudulently).
  • As the company has liability limited by guarantee, the members are normally only liable for the debts of the company to the extent which they have undertaken to guarantee them (usually the limit of liability stated in the memorandum of association is a nominal amount, e.g. £5).
  • There will be a fast track process to register as a Charitable Incorporated Organisation (CIO) under the new Charities Act 2006, should the directors wish to do so.

Disadvantages:

  • A company and its directors are subject to company law (e.g. Companies Act 2006 as in force) which can be complex in its operation. As a charity, it will also be subject to charity law.
  • Registration & filing requirements for companies; e.g. the annual filing of accounts and an Annual Return with the Registrar of Companies. Companies House will fine both the directors and the company if annual accounts or other requested information is not received on time or in the correct form.
  • Companies House must also be notified of all changes of trustees/ directors and copies of any special or extraordinary resolutions passed must be filed within 14 days. Someone will need to be responsible for company law requirements e.g. filing accounts; ensuring members receive proper notice of meetings (company secretary type role).
  • Existing members will have to re-register and sign up as members of the company if they want to stand as directors or vote at meetings. Non members can still attend general meetings. Registered members have to be individually informed of AGM’s and sent information, including full copies of company accounts, in advance.
  • Directors’ names and home addresses are publicly available, unless they can show good reason why they should be kept confidential.
  • Stationery and other documents will have to be changed to include a company registration number.
  • The company limited by guarantee is unwieldy for charities that do not have a membership structure. This is because the trustees tend to be both directors and members and have to make some decisions in one capacity and certain decisions in their other capacity. For example, if the trustees wish to change the name of the charity or make any other amendment to the Memorandum and Articles of Association they have to decide as directors to propose the change, agree the change as members and implement the change as directors (with all the paperwork that this involves).

 Charitable Incorporated Organisation

Advantages:

  • Limited liability for trustees
  • The charity only need to register once with the Charity Commission, and would not need to register with Companies House.
  • Less onerous requirements for preparing accounts. Small CIOs will be able to prepare receipts and payments accounts, larger charities will be required to prepare accruals accounts;
  • Less onerous reporting requirements – CIOs will only prepare an annual report under the Charities Act 1993. Under company law, companies have to prepare a directors’ report as well.
  • CIOs will only have to report to the Charity Commission.
  • One annual return – charitable companies have to prepare an annual return under both charity and company law;
  • Reduced filing requirements – CIOs will only have to send accounts, reports and returns to the Commission. Charitable companies have to file these documents both with the Commission and the Registrar of Companies;
  • Lower costs for charities. Unlike the Register of Companies no charge will be made for registration and filing documents.
  • Simpler constitutional form. The Charity Commission have produced model forms of constitution which will include fewer fixed governance provisions than is the case with companies.

Disadvantages:

Requirements to register as a charity

Unincorporated Association

What is needed?

The simple adoption of the constitution which should be signed by the committee members.

The following documents should be sent to the Charity Commission:

  • Charity application form and declaration
  • A completed copy of the constitution.

Company Limited by guarantee

What is needed?

The preferred process is to incorporate and register the company first. This saves having to re-register with the Charity Commission, although this is still, according to the Charity Commission, “still a relatively easy process”.

The decision to incorporate will need to be ratified by the membership, either at an AGM or an EGM.

The governing documents for a company are its Memorandum of Association (which sets out the company’s name, its registered office and the objects of the company) and Articles of Association (which set out the rules for the running of the company’s internal affairs). A Model set of these is produced by the Charity Commission. These will need to be agreed by the membership, as all members of the new company need to sign.

The company is registered with the Registrar of Companies at Companies House (Form 12 (declaration that all legal requirements of the process have been complied with), Form 10 (details of the first directors and address of the registered office of the Company), Form 30(5)(a) as well as signed copies of the Memorandum of Association and Articles of Association. Companies House will issue a certificate of incorporation on payment of a fee of £20.

The company is then registered as a charity using a standard application form and declaration form.

Assets and contracts will need to be transferred from the existing organisation to the new company. New bank accounts will be required and insurance details will have to be changed.      

The previous company will be closed at a meeting of members with a resolution to close the original organisation.

Charitable Incorporated Organisation (CIO)

What is needed?

A body could proceed with its registration as a charity either as an Association or a Company and then apply to convert to a CIO when the procedures are in place.

The new CIO is created on the basis of the model documents provided by the Charity Commission.

The new CIO is registered with the Commission and the existing unincorporated association is wound up.

Once all the assets of the unincorporated association have been transferred to the CIO. Banks, funders and suppliers will need to be informed of the transfer. Any existing contracts must then be assigned to the CIO