Opting to incorporate:Looking at CIO and company structuresMartyn RobinsonSolicitor, Geldards LLP

Overview1. Why legal structure matters2. What is a CIO?3. Advantages / disadvantages of CIOs and companies4. CIO structures5. Company structures6. Issues to consider upon incorporation7. Incorporating / registering8. Transferring into the CIO / company

1. Why legal structure matters• Trustee liability• Legal personality• Associated matters:

- Certainty for third parties- Good governance

1.1 Trustee liability• Unincorporated charities:

- Trustees are collectively liable for debts of the charity

- Trustees may be personally responsible- Insurance cover usually taken out- Relief of liability, if acted honestly and reasonably- Commission looking for imprudence, or legal

breaches

1.1 Trustee liability• Incorporated charities:

- Liabilities are met out of corporate assets of the charity

- Trustees simply manage the incorporated body- Members of the charity have limited liability- General principles of prudence apply to trustees

though

1.2 Legal personality• Unincorporated charities:

- Business conducted by the trustees collectively- Frequent problems with contracts / title to land- Administrative burden and cost

• Incorporated charities:- Charity has separate legal personality- Can own land, employ staff, enter into contracts

itself- Continuity / certainty of ownership

1.3 Associated matters• Certainty for third parties:

- More appealing to funders- Incorporated party contracting

• Good governance:- Simple, modern governing document- Administrative process up to date

2. What is a CIO?• A “charitable incorporated organisation"• Relatively new legal form only for charities• Corporate body not unlike a company• Automatically charitable once it exists• Attracts same tax treatments as charitable

companies

2.1 Usage of CIOs• New charities• “Transfer” to a CIO by existing unincorporated

associations and charitable trusts• “Conversion” to a CIO by charitable

companies and I&PSs (not yet available)

3.1 Advantages of CIOs• Charity Commission simultaneously grants:

- incorporation; and- charitable status

• Charity Commission is sole regulator• No requirement to comply with company law• No fee for registration• No penalties for late filings (at the moment)• Simple structure, intended for charities

3.2 Disadvantages of CIOs• Longer set-up time• Exists only upon registration• Lack of awareness outside sector• No charges register• CIO ceases to exist upon loss of charity status• Not available for exempt charities (e.g. I&PSs)

3.3 Advantages of companies• Can be incorporated within hours• Exist immediately, and can enter into

contracts etc.• Have an external charges register, for

creditors• Continue to exist upon loss of charity status• Are a well-established and familiar structure

3.4 Disadvantages of companies• Charity Commission application still required• Dual regulation by:

- Charity Commission; and- Companies House

• Requirement to comply with company law• Fee for registration• Penalties for late filings

3.5 Charitable company over CIO?• Larger organisations• Familiarity with:

- Companies Act 2006; and- Companies House processes

• Likelihood of charging property• Overseas involvement• Requirement for known company structure

4. CIO structures• Foundation model:

- Generally for transfers from charitable trusts• Association model:

- Generally for transfers from unincorporated associations

• Both have a ‘constitution’ as governing document

• Note that a foundation CIO can change to the association model, and vice versa

4.1 Foundation model CIO• The only members of the charity are the trustees• Akin to:

- a charitable trust; or- a company where all members are company directors

• Run by a small group of people• Trustees will make key decisions• Trustees will appoint trustees• Likely long term-lengths for trustees

4.2 Association model CIO• The voting membership can be wide and diverse• Akin to:

- an unincorporated association; or- a company with a wide membership

• Run by members as well as trustees, in some respects

• Members will make certain decisions• Members will elect some or all trustees• Likely fixed terms for trustees

4.3 Main differences• Foundation model:

- trustees are members• Association model:

- membership is wider than trustee board• Method of appointing trustees• No requirement for an AGM in a foundation

model• Appropriate model may be self-evident

5.1 Company limited by guarantee• ‘Articles of association’ as governing document• Trustees:

- Responsible for management of the charity- Also company directors- Appointment provisions are specified in the articles

• Members:- Vote on certain matters, including changes to the articles- Membership is flexible – can be the trustees, or wider

• Key is flexibility

5.2 Company limited by shares• Not generally a suitable structure, as members

are entitled to dividends, and a share of assets upon a dissolution

• Rare form for a charity, and not recommended

6. Issues to consider upon incorporation• Whether opting for a CIO or company,

consider:- Charitable objects- Administrative provisions- Governance to date

6.1 Charitable objects• Have your activities drifted away from your

objects?• Do your objects accurately describe what you do

(your charitable purpose)?• Do they cover you for future planned activities?• Is the ‘class of beneficiaries’ accurate?• Is the ‘area of benefit’ accurate?• Is the wording up to date?• Charity Commission consent required to changes

6.2 Administrative provisions• How do you want trustees to be appointed?• How do you want trustee retirements / board

rotation to operate?• Is it appropriate for you to hold an AGM?• Do you need to specify any honorary roles?• Are practices to continue as before?

6.3 Governance to date• Check – have the current trustees been

appointed in accordance with your governing document?

• Has the Charity Commission been notified of:- all updates to your governing document; and- changes of trustees?

• Is land held in the name of the current trustees?

7. Incorporating / registering• For CIOs, there is a single process of:

- registration / incorporation with the Charity Commission

• For charitable companies there is a dual process of:- incorporation with Companies House; and- registration with the Charity Commission

7.1 Registration of CIO• Preparing to register:

- Select constitution type (foundation / association)- Draft constitution, discuss and agree on key points- Approve and sign constitution- Sign ‘trustee declaration’- Draft application to register with the Charity

Commission- Ensure ‘public benefit requirement’ is met

7.1 Registration of CIO• Securing registration:

- Deal with any queries from the Charity Commission

- Incorporation granted on registration- Registered charity number provided- Entry on public register - Obtain password for amending details online

7.2 Incorporation of company• Preparing to incorporate at Companies

House:- Draft articles of association, discuss and agree key

points- Complete form IN01 / apply online / use

formation agent- Pay fee, and secure incorporation- Receive company number

7.2 Incorporation of company• Preparing to register at Charity Commission:

- Sign ‘trustee declaration’- Draft application to register with the Charity Commission- Ensure ‘public benefit requirement’ is met

• Securing registration:- Deal with any queries from the Charity Commission- Registered charity number provided- Entry on public register- Obtain password for amending details online

8. Transferring into CIO / company• Prepare transfer document• Pre-transfer issues to consider• Transfer process• Post-transfer issues to consider• Associated issues

8.1 Prepare transfer document• Transfer agreement• Details of:

- employees;- bank accounts;- investments;- property held (and whether on trust); and- intellectual property, other substantial assets

8.2 Pre-transfer issues to consider• Notify funders / creditors / suppliers of

transfer• Obtain consent to assignments of contracts

where required• Notify staff of TUPE arrangements• Consider pension crystallisation

8.3 Transfer process• Pass resolutions dealing with the transfer of:

- the existing charity; and- the new CIO

• Arrange execution of transfer agreement (and ancillary property docs if necessary)

• Formally complete all documentation

8.4 Post-transfer issues to consider• Dissolve existing charity (in accordance with

governing document)• Notify Charity Commission to remove existing

charity, or register a merger of the charities• Register any land transfers at the Land Registry• Apply to register CIO / company with HMRC

8.5 Associated issues• Impact on trading subsidiaries

- Where shares are held by nominees, transfer to CIO- Check processes in articles of trading company- Trading company becomes a subsidiary of the CIO- Deal with formalities

• Impact on VAT- VAT position will be the same- Depends on business activities of the existing charity- Should be familiar with this

8.5 Associated issues• Potential issues needing specialist advice

- Permanent endowment property- Funder / bank charges- Pension deficit

Any questions?

More information• Make the Charity Commission site a ‘favourite’:

- CIO guidance and information- Foundation / association model CIO constitutions- Model articles of association

• ‘Registering as a Charity’ (CC21)• ‘Choosing and preparing a governing document’ (CC22)• ‘Public benefit’ guidance (PB1, PB2, PB3, summary)• ‘Hallmarks of an Effective Charity’ (CC10)

Thank You

Contact details

Martyn RobinsonDD: 029 2038 6532E: martyn.robinson@geldards.com