A Charity’s structure can often be something that is not revisited by Trustees.
The structure that was most suitable when the charitable activities were first set up, may not be the most appropriate format now, as the charity may have evolved and grown in a manner or at a pace that was not originally envisaged.
An Unincorporated Charity is often the starting point for many charities, this structure has no separate legal identity and is governed by a trust deed or constitution. It is suitable where monies are gifted for specific purpose and no membership or employees are anticipated. Liability is unlimited, so trustees are jointly and severally liable.
The risk to the Trustees can increase when the original activities change, i.e.charity:
- Employs staff
- Leases premises
- Enters into contracts
- Undertakes non-prime purpose activities such as trading
- Receives a large endowment or legacy that will require investing to generate future income
When this happens, the Trustees should consider whether an incorporated structure would suit their purposes better:
- Limited Company Charity
- Charitable Incorporated Organisation
- Limited Company Trading Subsidiary
A Limited (by guarantee) Company Charity is a separate legal identity, governed by its Memorandum and Articles of association, where the liability of Trustees (who are also the Directors) is limited. This is a safer option where a charity: employs staff, owns or leases property, or enters into contracts with others. The charity cannot distribute any profits (no shareholders); it must apply its assets to charitable purposes and Trustees must always operate in the best interests of the charity.
However, this structure is subject to 2 lots of regulation, from both Charity Commission and Companies House.
As an alternative to a limited company structure there’s a Charitable Incorporated Organisation (CIO) this new legal entity was created in 2014 specially for charities and recognises their needs. The Charity only needs to register with Charities Commission but has benefits of being a corporate entity. However, CIO structure is not available to all charities; there are restrictions over borrowings; charity must use the CC model constitution; charity must meet certain requirements and there is a lack of public awareness of this structure. Existing limited company charities are now able to convert to CIO status subject to appropriate conversion criteria being met.
Additionally, where trading activities are being undertaken by the charity it is worth the Trustees considering forming a trading subsidiary to carry out these activities, this ensures the income and associated costs are separated from the charity itself and will not impact on its tax-exempt status. Profits from the trading subsidiary can be donated to the parent charity under gift aid however you must ensure that sufficient reserves remain in the trading subsidiary to act as working capital.
And finally, as a customised solution for social enterprise activities there is Community Interest Company (CIC), these are not a charity and do not enjoy the tax relief. However existing CIC’s can convert to CIO if they meet requirements to be a charity.