This article aims to provide an overview of the types of charity structures that exist together with some advantages and disadvantages. We would encourage you to read this first and if you need help in deciding which best for your charity, please contact us.
There are four main structures that a charity can use. These are:
- Unincorporated Association
- Charitable Trust
- Charitable Company
- Charitable Incorporated Organisation (CIO)
1. Unincorporated Association
An unincorporated association is a membership organization. It can be whatever its members want it to be, and carry out whatever activity you choose. It is the easiest, quickest and cheapest way for a group to set itself up.
- Some funders may prefer a more formal structure, especially if you are looking for big sums of money.
- Your group has no separate legal existence – it is a collection of individuals. This means that:
- it cannot own property in its own right
- it cannot enter into contracts – if it wants to rent premises or employ people, this is done in the eyes of the law by individuals on behalf the group.
- individual members of your management committee are personally responsible for the group’s obligations and debts, and are liable if, for example, it is sued.
2. Charitable trust
A charitable trust is a legal form which is set up by means of a trust deed. Naturally the aims of the trust must be charitable and the trust will register with the Charity Commission. A trust is usually set up to manage money or property for a charitable purpose.
- A charitable trust is an unincorporated organization which means that its trustees are personally liable for its obligations and debts.
- There is not generally any formal method for users to influence the work of the organization. All decisions are made by a small group of people who are not necessarily easily replaceable (The Charity Commission suggests having between three and nine trustees).
3. Charitable Company
A Charitable Company is a limited company with charitable aims. It is an incorporated organization which means that it has a legal identity separate from its members. In law, a limited company is considered to be a person and it can therefore own land or enter into contracts. The directors are agents of the company and are not personally liable for its debts.
There are many thousands of limited charitable companies listed on the charities commission website.
A company is a membership organization. However, unlike an unincorporated association, members must be named and a list of members forms part of the Company Register. A company can also demonstrate, through its Memorandum & Articles of Association (its governing document) that it is accountable to the community and charitable in its aims. The directors of a Charitable Company are also its trustees and perform the role of the management committee.
The Charity Commission provides a model Memorandum & Articles of Association for a Charitable Company but you would be well advised to seek legal help in drawing these up. Establishing a Charitable Company currently involves registering with both Companies House and the Charity Commission.
If your group is an unincorporated association which is already registered as a charity, there may come a point when you wish to become incorporated. This is done by forming a Charitable Company to take over the affairs of the unincorporated charity. The Charity Commission now has an application pack, together with advice and guidance, on its website which makes the process quicker and easier.
There are two types of limited company:
- Company limited by guarantee: there are no shareholders and any surplus is reinvested in the company. This type is recommended by the Charity Commission.
- Company limited by shares: this type of company is more usually found in the commercial sector, where its members (shareholders) are investing money in the hope of gaining a profit.
What are the advantages and disadvantages of forming a Charitable Company?
- It is very suitable for a larger organisation which has considerable assets (e.g. equipment, a building) and employs more than a few staff.
- The company can take on legal obligations and buy property in its own name. The organisation and not its members are responsible for any debts. However directors do have a legal duty to act prudently and to ensure that the company manages its finances carefully.
- Many funders regard this structure as more stable, as they know the company will continue to exist even if there is a change of people involved. This increases your chances of success if you are applying for larger sums of money. Some funders will give grants only to registered charities.
- It is expensive to set up. It is time consuming to run and annual accountancy fees can be high. A Charitable Company is regulated by both Companies House and the Charity Commission. You have to notify them of every change of directors/trustees and draw up a particular form of annual accounts and reports.
- A Charitable Company cannot have political or campaigning aims, but you can have educational ones
4. Charitable Incorporated Organisation (CIO)
This is a new form of organisation which combines a charity and company into one structure, regulated by the Charity Commission.
The introduction of CIOs in 2013 was the much-anticipated response to requests from the charitable sector for a legal structure created specifically for charities and which made it possible for charities to effectively run trading operations without risk of unlimited liability.
Currently, most charities are either trusts or unincorporated associations and as such these charities do not have a separate legal identity from their trustees, and their trustees and members do not have limited liability for any claims made against charities and charity debts. Charitable companies are a popular structure for charities to set up, or convert to, in order to avoid these issues. Whilst the charitable company structure circumvents the issues in relation to personal liability of the trustees/members and gives the charity a separate legal identity to enter into contracts in its own name, it causes dual governance by both the Charity Commission and Companies House. This dual governance adds extra administrative burdens on charitable companies including requiring them to file two separate sets of accounts and annual returns. Converting to a CIO or setting up as a CIO instead of a charitable company eliminates this dual governance.
This new charitable structure offers all of the benefits of a charitable company but without the regulation of Companies House and company law. CIOs do not therefore have to file two sets of annual returns and accounts. However, a CIO is a corporate body (like a company) that can own property, employ staff and enter into other contracts with suppliers in its own name (rather than in the name of trustees). Members of a CIO either have no liability at all or, like a company, limited liability for its debts.
How a charitable incorporated organisation could work
Like companies (which must have both members (shareholders) and directors), all CIOs must have members and charity trustees. There are two types of CIOs, one which has the members and charity trustees as the same people (the foundation model) and one which has members who are not trustees (the association model).
It is anticipated that because CIOs were introduced specifically for charities that this structure will be the most appropriate and effective structure. To run a CIO well guidance can be drawn from how successful companies are operated on a commercial basis. Subject to some modifications the basis for a successful company can be adopted within the charity framework using the CIO structure. Care is required in the drafting of employment contracts and governance guidelines along with roles and responsibilities of those involved in the charity as there are pitfalls.
Members or no members
Another consideration in charitable structures is whether there will be members who have the right to vote, or whether only the Trustees can vote. These are 2 separate variations for each charitable structure.
- Association model – where a charity will have a voting membership, who in turn will elect the Trustees. Most Gurdwaras will adopt this model.
- Foundation model – where the charity will have no voting members, and only the Trustees can vote and select new Trustees. Some Gurdwaras may adopt this model for example, when there are small numbers of sangat and it is hard to get participation.
There are other considerations to think about when deciding on the most appropriate structure
- Holding property, lands and assets including contracts – Will the charity hold property and other assets, enter into contracts such as employment or supplier contracts.
- Trustee liability – most Trustees are unaware of their liabilities as a Trustee of a charity. Unincorporated structures have unlimited liability on Trustees. This can mean where the charity does not have the funds to pay, the liability will fall on Trustees. As at the time of writing this, most Gurdwaras in the UK will have an unincorporated structure, and the Trustees are unaware they have unlimited liability. The Charity Commission is also keen to encourage Places of Worship moving towards the incorporated CIO structure created specifically help with this and keep administration simple.
- Regulatory and tax benefits – some structures have a dual regulator, meaning double the filings and administration to keep both regulators happy. As far as tax benefits go, only a registered charity can claim these e.g. the 25% gift aid reclaim on your donations, and that all charity income is tax-free. If you are not a registered charity, then potentially your income could be taxable, and you should certainly seek advice about this.
Compare and Contrast Structures
|Reporting to Charity Commission||Registration at Companies House||Limited liability||Separate legal identity||Charity tax benefits|
|Unincorporated incl Trusts||Yes||No||No||No||Yes|