Changing the structure of a charity

Changing the structure of a charity

The legal structure of a charity determines who will run it and whether it is a legal entity in its own right.  Ensuring your charity has the correct structure for its needs is very important; having the wrong structure may restrict the charity’s actions or leave it exposed to liability.  It is important for charities to review on an ongoing basis whether their existing structure continues to be fit for purpose.

The different types of charity legal structures:

The three most common types of charity structure are the following:

  1. A Trust
  2. An Unincorporated Association
  3. A Company Limited by Guarantee

There is now a fourth legal structure which many charities are considering converting to, called a Charitable Incorporated Organisation (also known as a CIO).  This structure is governed by the Charities Act 2011 and the CIO Regulations, and fully came into force in early 2013.

If your charity is currently an Unincorporated Association or a Trust then changing to a Corporate limited liability structure may bring the security that you require:

  • The CIO is a bespoke limited liability vehicle for charities; and
  • The Company Limited by Guarantee is a well known and versatile vehicle in the sector.

Why might I need to change my charity’s legal structure? 

There are many benefits in changing to a Corporate structure:

  • Employing staff: unincorporated charities cannot employ staff whereas Corporate charities can.
  • Reducing administrative burdens: CIOs only need to register once with the Charity Commission, whereas charitable companies must register with Companies House as well as the Charity Commission.  This means CIOs are not subject to Company Law administrative burdens.
  • Reducing liability: Unincorporated charities cannot enter into contracts in the charity’s own name.  This means trustees are required to enter into contracts personally, leaving them liable if something goes wrong.
  • Registering property: Incorporated charities can register the title to land or property in the charity’s own name, rather than in a Trustee’s name.
  • Reducing financial risk: an incorporated charity structure can provide trustees with more protection.

Overall, the Charity Commission says the CIO structure is most beneficial for small to medium-sized charities which often enter into contracts and employ staff.  A CIO also benefits from only having one regulator – the Charity Commission (whereas a Company Limited by Guarantee must also meet Companies House requirements).

The Company Limited by Guarantee is likely to remain a suitable option for larger charities, particularly where there is the prospect of borrowing against charity property.

If the CIO is the best option, which of its two types should I choose? 

If you decide to convert your charity to a CIO, there are then two types to choose from: association CIO or a foundation CIO.

Essentially, the difference between the two is that an association CIO has a wider membership than a foundation CIO.  Having a wider membership means the charity includes members who can vote on important decisions.

The Charity Commission advise that it is usually wise to choose the type of corporate structure which best matches your original charity.

You may wish to change to the association model if your original charity:

  • Has a constitution as its governing document; and
  • Has a wider membership which votes on important decisions, such as electing trustees or committee members

You may wish to change to the foundation model if your original charity:

  • Is governed by a trust deed, will, scheme or conveyance;
  • Is run solely by its trustees; and
  • Doesn’t have a voting membership

What do I need to do to change my charity’s structure?

Converting to a new corporate structure generally involves a three step process:

  1. Creating and registering the new CIO or Company Limited by Guarantee structure you wish to convert to;
  2. Transferring your original charity’s assets and liability to this new charity; and
  3. Dissolving your original charity

However, this process can sometimes be more complicated, particularly if your charity has permanent endowment (in other words, money or property that was meant to be held by the charity indefinitely).

Existing Companies Limited by Guarantee – watch this space!

In the reasonably near future, it will be possible for a Company Limited by Guarantee to switch to being a CIO using a fast-track procedure.

The Regulations for this process are currently awaited – please watch our web pages for an update.

If you are a trustee wishing to find out more about how to change your charity’s structure, download the Charity Commission’s useful step-by-step checklist.