Charity is a status that can be attached to several types of legal structure. Many thousands of charities are set up as unincorporated associations or trusts. These types of organisation are referred to as "unincorporated" as the organisation is not a legal entity in its own right separate from the individuals running the charity.
By contrast, companies and charitable incorporated organisations ("CIO"s) are types of legal structure which are legal entities separate from the people running them, which means, for example, the entity enters into contracts in its own name. They are referred to as "incorporated" organisations.
The incorporation of a charity involves a change of its legal structure from that of an unincorporated form to an incorporated form.
Reasons to incorporate a charity
1. Risk of personal liability to trustees
Because unincorporated charities are not legal entities, individual trustees hold the charity's property in their own names and are personally liable in relation to the charity's relationships. This means that if a third party brings a claim against the charity, the claim will actually be brought against the individual trustees.
The trustees will usually be able to use the assets of the charity (including the proceeds of any relevant insurance policy) to meet such claims, but if the charity has insufficient assets to meet its liabilities, the trustees' personal assets are put at risk.
By contrast, if an incorporated charity did not have sufficient assets to meet its liabilities it would go through an insolvency process. The personal assets of the trustees would be protected, except in limited circumstances - for example, if the trustees breached their duties by allowing the charity to continue trading when they knew it was insolvent.
The risk of personal liability is generally the primary reason a charity considers incorporating. The actual risk of personal liability will vary from organisation to organisation depending on the nature of the activities the charity undertakes, and hence the risk of a claim, and the assets available to the charity to meet any liability that does materialise. Even where the risk is very small, some organisations take the view that their trustees (usually being unpaid volunteers) should not take on any more risk than is absolutely necessary, and so the charity should incorporate.
2. The ability to attract new trustees
This is closely tied to the first reason. It can be more difficult for unincorporated charities to attract new trustees. Prospective trustees can be concerned about the risk of personal liability, particularly when they will often know relatively little about the inner workings of the charity and hence the associated risks.
3. Ease of administration
An unincorporated structure can also be inconvenient for the holding of property, because individual trustees often hold the property in their own names on behalf of the charity. Trustees will change over the years and if records and documentation do not keep up with these changes (which is often the case) this can cause problems - for example, if the charity wants to sell a property, but the property is held in the name of former trustees who may no longer be contactable, or who may even have died since the records were last updated.
A company or CIO holds property in its own name, so there is no need to update documentation relating to ownership when trustees change.
4. Third party requirements/ perceptions
Incorporation is often perceived to be part of the "professionalisation" of a charity. It can be a helpful catalyst to achieve a more structured and modern governance model. It can also lead to a change in how the charity is perceived, both internally and externally.
Some charities incorporate with a view to altering how they are perceived by third parties and to ensure that they meet requirements - for example, to help secure an accreditation, ensure eligibility for a particular pot of grant funding or to assist with a transaction with their bank.
Reasons not to incorporate a charity
Despite all of the above, clearly there are many charities which remain unincorporated and continue to operate very well. If trustees do not regard there to be any pressing or particularly persuasive arguments to incorporate, it may be simpler to remain unincorporated.
1. The cost and effort of incorporating
The complexity of the incorporation process varies greatly between different organisations, depending on the size of the charity, the nature of the assets held and also any internal governance hurdles to overcome (for example, a reluctant membership).
All of this should be considered and the likely cost and effort of incorporation should be weighed up against the benefits before the trustees decide whether to proceed.
2. Governance and filing requirements
Unincorporated organisations generally have greater flexibility in how they approach their governance and they can have simpler governing documents.
Very small unincorporated charities will have less onerous filing requirements.