There are a variety of legal structures available to charities. The two most common structures for charities setting up that want the benefit of limited liability are:
- the charitable company limited by guarantee
- the charitable incorporated organisation (CIO)
As CIOs only became an option a few years ago, many charities were historically set up as companies limited by guarantee.
It is now possible to convert a charitable company to a CIO by following what is hoped will be a fairly straightforward process. Prior to the implementation of the new conversion process, if a charitable company wanted to become a CIO it would have to set up a new CIO, transfer all of its assets and liabilities to the new CIO and the original charitable company would subsequently be wound up. Particularly for larger charitable companies or those with assets and liabilities requiring third party consent to transfer (e.g. a lease) this would be a costly and time consuming exercise. For this reason, very few charitable companies went through this process, even though many would have preferred to be CIOs.
There are some advantages and some disadvantages to being a CIO compared with a charitable company. What is right for any particular charity should be considered in its specific context.
Some charity trustees prefer the idea of a CIO as it seems simpler. There is only one regulator (the Charity Commission), there is no need to consider company law or deal with Companies House and, for some prospective trustees, the perception of becoming only a charity trustee as opposed to also becoming a company director can seem less daunting. The charity only has filing obligations with one regulator and, if the charity has an annual income of less than £250,000, it will benefit from more relaxed accounting rules.
On the other hand, charities that could want to borrow money in the future may find it easier to deal with banks if they have a charitable company as opposed to a CIO structure. This is particularly true if the charity is considering securing property that isn’t land. Where Companies House maintains a register of charges, the Charity Commission does not. This means that lenders to CIOs who are taking a charge against something other than land do not have any public means of recording (and alerting others to) their charge.
Other factors such as the more entrenched and familiar nature of company law compared with the law governing charitable incorporated organisations may be attractive to some, particularly larger, charities.
It is also worth noting that, whilst being a charitable company often means extra administration, charitable companies can often make changes to their constitutions much more quickly than CIOs can. Changes to a charitable company’s constitution (its Articles of Association) come into effect on the date a special resolution of the company’s members is passed (unless the charity is changing its objects in which case the change becomes effective on the date the amendments are entered onto the Register of Companies). Any changes to a CIO’s constitution, on the other hand, only become effective on the date the Charity Commission registers the changes (although this may change in coming years pursuant to a proposal of the Law Commission). The Charity Commission is under-resourced and its response times can be long meaning there can be a period of delay before a CIO’s constitution is updated.
How to convert
The Charity Commission has produced a summary of the legislative changes which includes a timetable showing when the conversion process will become available to larger organisations. There is also Commission guidance on how to convert a charitable company to a CIO.
There is an online application where the charity needs to produce:
- a copy of a resolution of the company confirming its decision to convert and approving the CIO constitution,
- a copy of the proposed CIO constitution,
- a signed trustee declaration form, and
- details of any ‘entrenchment’ provisions in the constitution.
The most important part of the process will be for converting charities to prepare an appropriate CIO constitution, which will inevitably look slightly different to the charitable company’s Articles of Association.
This needs to be done carefully to ensure the charity does not inadvertently change the rights of its members or constitutional processes without proper consideration or authority to do so.
The charity will also need specific Charity Commission consent in order to change its objects, trustee benefit provisions or dissolution clause.
The process is very new so it remains to be tested and could of course evolve over time.
If you would like to discuss whether your charity should consider converting or the conversion process itself, please contact our specialist charity and social business team.