What charities need to know about Charitable Incorporated Organisations

Thea Longley, partner at Bates Wells & Braithwaite, discusses the pros and cons of Charitable Incorporated Organisations and what types of charities are likely to benefit the most.

Many social enterprises are set up as charities or include a charity in their group structure. A charity can undertake trading that furthers its charitable objects.  Charitable social enterprises include nurseries, leisure centres and organisations working to rehabilitate offenders, to name but a few.

At the end of last year the Charity Commission started accepting registrations for Charitable Incorporated Organisations (CIOs) – a new type of corporate entity designed specifically and only for charities. The CIO has been six years in the making. It is one of the reforms brought in by the Charities Act 2006 and is viewed by many as one of the most innovative reforms to date.
 
It effectively means that charities no longer have to face dual regulation if they incorporate and are simply monitored by the Charities Commission, instead of being regulated by the Charity Commission and Companies House - reducing red tape and other costs associated with reporting and governance.
 
It also offers the benefits of limited liability making it easier to recruit and retain trustees, and legal personality making it easier to hold property and enter contracts. The CIO will add to the range of legal structures charities can adopt, and it is expected to be a popular choice, particularly for small to medium sized organisations.
 
A charity can choose an unincorporated form, such as a trust or an unincorporated association; or an incorporated form, typically a company limited by guarantee. Incorporated charities have their own legal personality – they can enter into legal relationships in their own name – and their trustees have better protection from personal liability for the charity’s debts than the trustees of unincorporated charities.
 
Up until now, the most common incorporated legal form for a charity has been the company limited by guarantee. However, charitable companies limited by guarantee must comply with dual regulation from the Charity Commission and Companies House, which some find burdensome. They are also subject to company law, as well as charity law, in relation to their governance arrangements. CIOs only need to register with the Charity Commission and comply with charity law, which will cut down on red tape for trustees.
 
In a nutshell therefore the CIO provides all the benefits of incorporation for registered charities within a more attractive legal framework and promises to reduce regulation and costs. However, there has been great debate about the pros and cons of CIOs, particularly whether charitable companies should consider converting. 
 
It is not suitable for every charity and on the whole it seems that the disadvantages may outweigh any advantages for larger and more complex charities.  A more suitable option for larger charities could be a company limited by guarantee, especially those that might have need to give fixed or floating charges in relation to their borrowing.
 
However, there are some less publicised advantages to CIOs including, for large membership charities – for example, the email communication regime with members is much more flexible than it is for companies.
 
What are the main pros and cons?
 
The main advantage of a CIO is the limited liability afforded by an incorporated form, alongside the lower administrative burden associated with being regulated by the Charity Commission alone, and not by Companies House. The CIO is the only bespoke legal vehicle for charities, and has been designed with charities in mind.
 
In some instances, the CIO may be more flexible than a charitable company limited by guarantee because a CIO constitution can allow for decisions at meetings to be by consensus, for example. The regime for electronic communications with members is also less rigid than the regime that applies to charitable companies. And smaller CIOs can prepare receipts and payments accounts, while smaller charitable companies must prepare accounts on the accruals basis.
 
However, CIOs are untested and some may wish to wait and see how they ‘bed down’. While charitable companies can take advantage of the backdrop of company law, the CIO is new, and grey areas are bound to emerge. There are also benefits to being a company that may be important for larger charities with more complex financial arrangements. CIO legislation makes no provision for the maintenance of a register of charges, which may make more it difficult for a CIO to borrow, as a lender will not be able to obtain the protection of registering a charge at Companies House.  Whilst banks develop their lending policies to CIOs, we are advising clients not to register as a CIO if they may need to borrow from banks now or in the future. 
 
There are also some differences between a CIO and a company in terms of governance. For example, company law confers certain absolute rights on its members, in a way that the CIO regime does not. Company members have automatic rights to receive accounts, call meetings, vote by proxy, demand a poll and remove a trustee: a member of a CIO will have none of those rights unless the constitution expressly provides them. Similarly, while a company can change its constitution with a written members’ resolution of 75%, a written members’ resolution for a CIO must be unanimous.
 
What does it mean for new and existing charities?
From 10 December 2012, only “brand new” charities (and the Commission is discouraging ones under the £5k threshold from applying).  The Commission will start registering CIOs from 2 January 2013, when the regulations come into force.
From 1st March 2013
Unincorporated charities with income over £250k
From 1st May 2013
Unincorporated charities with income over £100k
From 1st July 2013
Unincorporated charities with income over £25k
From 1st October 2013
Unincorporated charities with income over £5k
From 1st January 2014
All unincorporated charities
Anyone establishing a new charity should certainly consider whether a CIO might be an appropriate vehicle. Smaller charities are likely to find the protection afforded by a limited liability entity, coupled with the lower administrative burden, a real advantage. New charities that plan to hold significant assets, or borrow funds, may still prefer a company form. The Cabinet Office has assumed that the target market for CIOs will be charities with incomes of between £10,000 and £500,000.
 
Existing unincorporated charities that are seeking to incorporate may also wish to consider the CIO as an option. Again, limited liability, without the need to file paperwork with Companies House, may be attractive to smaller charities.
 
Existing companies limited by guarantee already have the advantage of limited liability. The main advantage of the CIO is the less burdensome regulatory and administrative regime. However, at present, there is no statutory procedure by which existing charitable companies can convert to CIO status. The part of the legislation that provides a framework for conversion is unlikely to be in force before 2014.
 
The long anticipated CIO is a welcome new legal structure for charities to consider. It offers the benefits of just one regulator and reduces reporting requirements, allowing charities to get on with what they are set up to do. However, we would urge all charities who are considering a CIO to seek legal advice to ensure it is the right structure for them - as it’s not going to be suitable for all.