At Work: Law and Governance - Keep it legal - Incorporation

David Rhodes, an associate solicitor at Yorkshire law firm Andrew M Jackson

Most charities in the United Kingdom are constituted as charitable trusts, run by a body of trustees who carry personal liability should they fail to meet their obligations and responsibilities.

Acting as a trustee of a charity is, therefore, a generous undertaking, because alongside the commitment of time and energy, the trustees are placing themselves in a position of financial risk with no limit to their potential liability. There is no protection for the trustees from this personal liability because the trust is charitable.

Charities that exist as trusts are not separate entities recognised by law. A practical consequence of this is that assets such as land or investments cannot be held in the charity's name, but must be held in the names of the trustees. This gives rise to extra administration and costs when trustees retire and are replaced, because assets need to be formally transferred to the new trustees. What's more, the charity cannot enter into legal contracts in its own name. The trustees must enter into the contract and, as a result, take on the charity's obligations, rights and responsibilities.

These are concerns for many trustees. A solution for some will be to turn the charitable trust into a company. In doing so, the original trust is wound up and a new incorporated organisation with the same charitable aims is created. The assets of the former trust are transferred to the new organisation and matters proceed as before.

Because companies have a separate legal existence from the shareholders and directors, incorporated charities can hold assets in the name of the company. Individual personal liability is reduced because any liabilities are the company's. However, directors still carry responsibility for losses caused by any misapplication of the charity's funds.

Incorporation offers the benefits of risk and liability management and some administrative convenience. However, it carries higher set-up and running costs because of the greater formalities and compliance requirements involved in running a company.

Legal advice should always be taken to make sure that incorporation is the best solution to meet the charity's objectives when compared with alternatives such as the charitable incorporated organisation, identified as an option in the Charities Bill.

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