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Charity or Charitable Incorporated Organisation?

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The Charitable Incorporated Organisation was created by the Charities Act 2006. It is similar to a company limited by guarantee (the form of organisation frequently used by charities) in that it affords the protection of limited liability and is a legal entity in its own right, but is differentiated from them in requiring only to be registered with the Charity Commission  and not also with Companies House. This avoids dual filing.

The Charities Commission is working to an implementation timetable with the Cabinet Office and applications are being accepted depending on the turnover of the organisation. However, currently a charitable company cannot convert to a CIO. However, it is hoped that legislation will enable this in the near future.

So what are the pros & cons?

Pros

The most obvious advantages are:

  • Limited liability, so that normally the trustees and members will be protected from personal liability.
  • Separate legal personality, so that the CIO becomes the other party to any contract.
  • The CIO can have vested in it any permanent endowment held by an unincorporated charity. This can be done by a simple vesting declaration.
  • The CIO’s annual return and accounts need only be filed with the Charities Commission
  • Two simple model constitutions have been developed for CIOs:  (1)the foundation model, where the only voting members will also be the trustees; (2) the association model, where the charity will have a wider membership of voting members other than the trustees.The former will be akin to an incorporated charitable trust; the latter akin to a company limited by guarantee.
  • The CIO must be incorporated using one of the simple forms of constitution published by the CC (or as near to those forms as circumstances allow). It should therefore be relatively inexpensive and easy to register a CIO electronically using the CC’s website. Provided there is no conflict with the constitution, it can also make its own Rules and Bye-Laws.

Cons

However, there are some important disadvantages to be borne in mind before deciding whether to opt for this structure.

  • An exempt charity cannot be or become a CIO, because all CIOs must register with the CC.
  • A charity with an annual income of less that £5,000 does not have to register with the CC at all, but every CIO, irrespective of its income must register (subject to the implementation plan referred to above).
  • Unlike Companies House, the CC is not operating a searchable register of charges. Although a CIO can register a mortgage on land at the Land Registry, there will be no register of any debentures issued by CIOs. Banks often require such forms of security for lending to limited liability organisations, and in the absence of a register of such charges for CIOs, it remains to be seen whether they will be willing to make advances to a CIO.
  • Correspondingly it is unlikely, when the conversion becomes possible, that a company limited by guarantee which is considering converting to a CIO would be allowed to do so by any bank or other lending institution to which it had issued a debenture by way of security.

Conclusions

  •  If an existing charity is essentially a grant making charity, making grants from the income derived from its endowments, there is unlikely to be any major advantage in becoming a CIO.
  • If any existing unincorporated charity is, however, providing services to the community – such as a school, or care home – then the CIO would be an advantageous way of securing limited liability for the charity trustees, and for the members, particularly since the form of incorporation documents is simple, and returns and accounts need be filed only with the CC.
  • However, if the service providing charity is likely to need to issue debentures over its fixed and floating assets as a condition of receiving bank finance to fund its operations, the lack of any register for such instruments is likely to make the proposition unattractive to such a lender.
  • The only advantage to a charitable company limited by guarantee (which has not borrowed monies against such security) in converting to a CIO (when the implementation plan permits) would be the marginal accounting and filing costs of filing returns and accounts only with the CC.

Acknowledgment: Charles Russell LLP


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