The Charities Act 2011 introduced the new form of a legal entity, known as a charitable incorporated organisation (CIO) 3,426 charities have registered as CIOs. We explain why it may be beneficial for an unincorporated charity to convert to a CIO and the process for doing so.
Unless a charity is purely grantmaking, its activities almost certainly involve a level of risk, which may create personal liability for the trustees. It is possible to give considerable protection to the trustees of a charity by incorporating as a company limited by guarantee or a CIO.
Charity Commission
CIOs are increasingly popular although their power to borrow money is limited since there is no register of charges at the Charity Commission for a lender to give notice of its security. However, a CIO is a separate legal entity in its own right and enjoys a simple regulatory regime since it only has to register with, and report to, the Charity Commission.
By contrast, a company limited by guarantee has to comply with two sets of regulations – those under company law and those under charity law. A CIO is able to hold property itself and does not require trustees to hold property on its behalf, thereby avoiding the need to document assignments of property or contracts every time there is a change of trustees.
Trusts converting to CIOs
The Charity Commission said some while ago that it was going to introduce a straightforward procedure for trusts to convert to CIOs. We are still waiting for these regulations to be issued. Until then the way to proceed is to incorporate a new charity in the form of a CIO; transfer the assets from the old charity and then dissolve the unincorporated charity. This process involves drafting a new constitution for the CIO and then applying for registration to the Charity Commission. Once the CIO is registered, an agreement is prepared to transfer the assets of the original charity to the new CIO.
Care should be taken over the transfer of existing contracts (including employment) since a change of control may be triggered or novations and registration of property may be required. Once the asset transfer has been completed, the original charity is dissolved.
If we can be of help to you or if you would like to discuss this in more detail please contact our charities and not-for-profit team.
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