Board Talk: Making sure charities have the correct legal structure

Tom Murdoch and Sandy Adirondack evaluate the ins and outs of incorporation

It is important that trustees make the right decision about whether to incorporate or not, says Sandy Adirondack
It is important that trustees make the right decision about whether to incorporate or not, says Sandy Adirondack

TM: Legal structure is crucial on many different levels. Charities are fundamentally constrained by their legal purposes, or objects, from which all else should flow. It is essential that they get their objects right from the start. But charities shouldn't get hung up on legal structure. The legal vehicle is only the tail and shouldn't wag the dog; it should facilitate the work of the charity, not unduly restrict the assets or liabilities the charity can take on, nor leave its trustees unacceptably exposed to risk.

SA: A charity that is small, and likely to remain so, has no employees or premises, does not carry out risky activities and avoids potentially onerous contract commitments is probably fine with an unincorporated structure, such as an association or trust. Its trustees could be personally liable if the organisation gets into financial difficulties, but the risk of this can be reduced by good governance and financial procedures. However, it's crucial to review the structure every two or three years, or when the charity takes on paid staff, a lease, contracts or risky activities. At that point it should seriously consider becoming incorporated, probably either as a charitable company limited by guarantee or a charitable incorporated organisation.

TM: I'm a trustee of Zambia Orphans of Aids UK, and the board considered these issues recently. It was originally a small, grant-making charity and, as such, was well suited to its unincorporated association structure. However, as it grew and took on school building and other project work in Zambia, we decided to incorporate in 2011 by setting up as a new CCLG. The crucial factor was our growing direct involvement in projects and the greater potential for personal liability of trustees in an unincorporated structure. Trustees considering incorporation should be aware that the process involves setting up an entirely new charity and transferring all the assets and liabilities of the old one over to it.

SA: I'm aware of an organisation in which the trigger for incorporating was a libel threat over an article in its newsletter. The trustees realised they could be personally liable if the case went ahead and they lost. As well as personal liability, another reason for incorporation is wanting to own property or enter into leases and other contracts as an incorporated body, known as a "legal person". This would otherwise have to be done by the trustees or other individuals, as is generally the case in an unincorporated structure. A question about Zambia Orphans of Aids UK: if you were incorporating now rather than in 2011, would you have gone for the CIO rather than CCLG?

TM: That's interesting. Although CIOs have only one regulator, the Charity Commission, I think CCLGs have significant advantages. CCLGs are well understood by banks and other third parties. Although charity law provides an equivalent framework for CIOs, it is less well understood and not supported by a body of helpful case law. Other differences include the fact that, unlike Companies House, the Charity Commission does not maintain a register of charges for CIOs. Charges registers protect lenders; without these, CIOs might find it harder to borrow than CCLGs.

Another useful feature of CIOs is a streamlined procedure for receiving permanent endowment and other subsidiary trusts as sole trustee; with CCLGs an additional application to the commission might be required.

SA: Those last comments show the importance of making the right decision about whether to incorporate or not, and then understanding whether CCLG or CIO is most appropriate for your charity. There are other issues too - such as being sure all assets and liabilities are properly dealt with during the transfer. And usually the original unincorporated charity will be wound up, but your charity might need to retain it as a shell.

The Charity Commission's guidelines Becoming a Charitable Company or CIO, which is available on its website, is a good starting point, but you might also need to get specialist advice.

Tom Murdoch is a senior associate at Stone King, where he specialises in charity law, and a trustee of Zambia Orphans of Aids UK

Sandy Adirondack is a governance consultant and trainer, who produces a legal update website for voluntary organisations

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