Corporate Focus - November 2009

Charities Inc.?

Charitable incorporated organisations

Organisations with charitable objects have long been able to take advantage of the benefits that come from having charitable status registered with the Charity Commission (“the Commission”), such as tax reliefs and special charity grants.

Many charities are established in an unincorporated form, for example as an association or trust, however increasingly charities (particularly the larger ones) have been choosing to adopt a corporate structure to take advantage of the benefits this can provide such as:

An incorporated structure – this gives the charity a legal personality of its own, enabling it to conduct business in its own name, rather than in the names of its trustees
The capacity and powers of an incorporated charity are generally clearer than those of an unincorporated charity – it can also be easier for people dealing with an incorporated charity to assess the credit risk of doing so
The members and trustees of an incorporated charity are usually personally safeguarded from the financial liabilities it incurs, which is not the case for unincorporated charities

Companies which are limited by guarantee are the most common form an incorporated charity will take.

If this is already the position, why is change needed? What exactly are CIOs?

The main drawback for these incorporated charities is the dual system of regulation they are subject to. They must comply with both charity and company law provisions and register with both the Commission and the Registrar of Companies.

This is not only onerous, but company legislation is, after all, designed for companies - there is now widespread recognition that company law may not always be appropriate or suitable for charities and other not-for-profit organisations whose defining feature is that they do not distribute profits to their members.

The CIO is intended to combine the advantages of a corporate structure (such as reduced risk of personal liability) without also being subject to the burden of dual regulation.

Charitable Incorporated Organisations (CIOs)

Section 34 of Charities Act 2006 makes provisions for this new charitable structure and secondary legislation is currently being drafted in order to assist in the implementation of this. It is intended that the CIO provisions will start to be implemented in late Spring 2010.

It is expected this new structure will appeal to medium sized organisations as well as existing organisations who may not be incorporated (or who may already be incorporated but wish to benefit from the reduced regulation and administration).

Key characteristics and advantages

Single regulation and registration – a charitable company has to register with the Registrar of Companies at Companies House and the Commission as well as being subject to both charity and company law. A CIO will only need to register with the Commission and will only be regulated by charity law.
Less stringent requirements for preparing accounts – the general income-tested regime in the Charities Act 1993 applies. Small CIOs may just prepare receipts and payments accounts along with a statement of assets and liabilities. Larger CIOs will need to prepare accrual accounts.
Less onerous reporting requirements – CIOs will not have to prepare a Directors report for Companies House, but instead will only prepare an annual report to the Commission.
One annual return – CIOs will only have to send their annual return to the Commission, however charitable companies will have to prepare an annual return under company law for filing, and a separate return for filing under charity law.
Simpler constitutional form and less onerous requirements relating to reporting of constitutional and governance changes – the Commission will make available models of CIO constitutions for public use and which will contain fewer fixed governance provisions than is generally the case for charitable companies. Generally CIOs will have greater flexibility in how they can draft/amend their constitution throughout the life of the CIO (although this will be subject to certain principles such as not including any restriction that would deprive the CIO of its ability to dispose of its property).
Lower costs for charities – the Commission make no charges for the registration and filing of information.
More straightforward arrangements for merger and reconstruction – the Charities Act 2006 contains a number of provisions designed to facilitate merger and reconstruction which will benefit CIOs but which are not available to charitable companies.

Disadvantages

A CIO must be a charity at the time of registration; therefore an exempt charity cannot be a CIO.

Its principal office must be situated in either England or Wales.
          Certain details will be publicly available namely:
                  -         Date of registration
                  -         Details of the governing document
                  -         Details of charges over the CIO’s property
                  -         Particulars of debentures issued
                  -         Register of trustees and members of the CIO will be available for public inspection.

However some of the above details will already be available in respect of charities registered with the Commission on their website, and this transparency may serve to promote the CIO and will also aid the Commission in their regulatory role.

It must also be considered that whereas the concept of a company/charitable company is universally understood, CIOs are currently unknown and untested. For organisations such as unincorporated charities for example, the structure of a CIO is also likely to be more complex than their current structure and will mean more administration.

However whilst there are some potential drawbacks in respect of this new structure available for charitable organisations, many organisations may consider over the next few months that these are far outweighed by the advantages that CIOs will provide, and that time currently spent adhering to unnecessary company legislation could perhaps be better spent in the future on focussing on promoting the charitable purpose and aims of the organisation.

Unfortunately charities and other forms of organisation must wait to be able to benefit from the CIO structure, but as soon as this is available it is doubtful that any such organisation will overlook the opportunity to at least consider their options going forward in light of the recent legislation.

If you would like any further information on this topic, please contact Chantel Clague on 0151 242 6524.