Leading law firm Roythornes has announced that its Charity of The Year will be St Barnabas...
Many charities are considering changing their structure to a Charitable Incorporated Organisation (CIO). Before starting the conversion process, trustees should be fully aware of the structure, advantages and considerations of CIOs and the potential drawbacks. We have covered the main issues below, but if you have any further questions, please do get in touch.
The CIO Structure
A Charitable Incorporated Organisation (CIO) has been designed specifically and exclusively for charities and is administered solely by the Charity Commission (as compared to adopting a company structure which would require the charity to register with both the Charity Commission and the Registrar for Companies).
A CIO will have members (similar to shareholders or members of a company) and charity trustees (similar to directors). These can, and often are, the same individuals.
There are two types of CIO:
- Foundation CIO is usually run by a small group of individuals (ie. the charity trustees) who are both members and charity trustees and make all the strategic and day-to-day decisions.
- Association CIO is for circumstances where there are to be voting members (in addition to the charity trustees), who vote on important strategic decisions only and leave ‘day-to-day’ decisions to the charity trustees.
Advantages of adopting a CIO structure
- Original constitutional documentation of an unincorporated charity (such as a charitable trust, often amended by Schemes and Orders) can become rather antiquated and unclear. Therefore, it can be helpful from an administrative perspective for trustees to modernise the governing documentation and bring it in line with how the charity actually operates in practice.
- The liability of the member(s) will be negligible or more limited (for example the CIO can enter into contracts and bear the associated risk rather than the charity trustees personally), although the charitable trustees should recognise that they will not devolve themselves of the statutory requirement to act in accordance with their duties and responsibilities under the law.
- A CIO can register the title to any of the charity’s property and land, employ staff and enter into contracts in its own name, rather than in the name of the charity trustees or holding/custodian trustee(s). Equally, in the event of any dispute or investigation, it will be the CIO named as the party to the legal action rather than the trustees personally – which can be appealing from a reputational perspective.
- If appropriate, a CIO can set up and own a subsidiary trading company in its own name – which can be beneficial for tax purposes and help separate out charitable and non-charitable activities.
- Structuring as a CIO can assist from a credibility perspective in ensuring that the charity is not perceived as a commercial enterprise in the eyes of potential donors and benefactors.
- A CIO is simple and cheap to set up using the model constitution as published by the Charity Commission.
- The CIO accounting regime is less onerous than that applicable to companies under the Companies Act.
Considerations when converting to a CIO
- Depending on the current structure and constitution, it may be necessary to seek approval from the Charity Commission. In any event, as most CIOs will have the same trustee board as the unincorporated charity, the trustees will need Charity Commission approval to proceed notwithstanding the conflict of interest. In addition, if assets are being transferred as part of the transaction, there may be a statutory ‘substantial property transaction’, with Charity Commission consent required.
- It should be noted that the process of re-structuring takes a few months to complete, not least because the CIO registration takes around 40 working days (ie. 2 months) to be approved and the transfer of Charity’s operational assets cannot be effected until 60 days (ie. a further 2 months) after the relevant registration resolution is filed with the Charity Commission.
- The trustees should bear in mind that in incorporating, Charity’s assets would be transferred to a new entity and so there will be administration tasks to complete (see below) which will take time and may result in legal costs.
- In addition, there will be increased ongoing registration and regulation requirements, albeit this is not generally considered to be too onerous.
- It is also worth noting that none of the employees of a charity can be appointed as charity trustees whilst they receive remuneration from the charity.
- Whilst trading on a small scale is permitted by HMRC, the CIO will not be allowed to engage in taxable permanent trading for the purpose of raising funds. Therefore, in the event that the Charity is likely to raise funds from trading at a future point in time, tax advice should be sought in order to structure appropriately, such as setting up a trading subsidiary company the shares of which are owned by the CIO.
Establishing a CIO
There are a number of steps you will need to take in order to set up a CIO, including:
- Ensuring that Charity’s trustee board are aligned in terms of a change of structure.
- Confirming that any change in structure is in line with Charity’s purposes.
- Completing due diligence/housekeeping to ascertain Charity’s assets which need to be transferred.
- Providing information to the Charity Commission, and registration of the CIO online.
- Transferring Charity’s assets under the provisions of a legal Vesting Deed.
- Dealing with perfecting asset titles – ie. Land Registry Filings, Stock Transfer Forms, IP Registrations.
- Ensuring that any employees of the charity are transferred in line with TUPE regulations.
- Opening bank accounts in the CIO’s name or transferring existing bank accounts into the name of the CIO.
- Notifying insurers, all stakeholders and other third parties of the change in legal identity.
- Once the CIO is established, closing the original charity.