Opinion

Converting to a Charitable Incorporated Organisation – Is it right for your Charity?

9th May 2019

Converting to a Charitable Incorporated Organisation  – Is it right for your Charity?

CIOs were introduced as a new incorporated legal structure for charities back in 2013 and they have proven to be a popular structure for new charities to adopt.

But what are its benefits and is it right for your organisation?

One of the benefits to charities of adopting a CIO structure is the limited liability similar to that which comes with being a charitable company. By contrast, in an unincorporated structure there is no limit on the liability and the trustees are personally liable, on a joint and several basis, to meet the liabilities of the charity if there are insufficient assets. In a CIO structure the trustees would be protected from this outcome in all but certain circumstances.

The new structure also allows charities to enter into contracts in the name of the organisation rather than in the individual names of the trustees. In addition, CIOs do not have the administrative burden of filing accounts with Companies House as they are only regulated by the Charity Commission.

What Should Charities Be Aware Of?

The biggest downside for many charities is the lack of public recognition of CIOs, although this is less and less of an issue as time goes on.

There is also no Register of Charges which would allow the charity to register a charge in the same way that a company can at Companies House. As a result a CIO would be less attractive to a charity which needs to borrow money and register securities.

A New Statutory Conversion Process for Some Legal Structures

The CIO conversion implementation timetable was staggered over nine months from January to September 2018 depending on an organisations legal structure and income.

All charitable companies and Community Interest Companies can now apply to use a simplified conversion process to convert to a CIO structure.

Historically, existing charities who wanted to adopt the CIO structure would have to close down the existing charity and transfer its assets before they could start operating as a CIO.

However the conversion process should help to greatly simplify the process – one key advantage being that the existing charity will be converted into a CIO, thus keeping its existing charity number, and making the process much more straightforward.

This development is likely to be most popular with smaller charities that are keen to take advantage of limited liability but are put off by the additional burden of complying with Companies House regulation.

The new rules are designed to make it much easier for organisations to convert to CIO status, but this process won’t be suitable for all charities and professional advice is required to navigate organisations through any potentially complicating factors.

For example, having employees does not preclude conversion but will require professional advice to help manage the impact of the change in structure, including on any pension provision. It is important therefore that organisations seek professional advice in good time ahead of a conversion to make sure the process is dealt with appropriately.

 How Does the Process Apply to Different Structures?

 Charitable Company

Companies can take advantage of the new conversion process. The existing corporate body is re-registered as a CIO and keeps its registered charity number.

A charitable company cannot convert if:

  • any of its shares (if applicable) are not paid up;
  • it is an exempt charity.

Any existing commitments the company has should be scrutinised as part of considering whether it is appropriate for the company to convert. For example, any outstanding charges need to be considered carefully, the lender consulted and the impact of conversion considered given the lack of register of charges for CIOs.

Any legacy to a charitable company becomes payable to a CIO under the Charities Act 2011 provisions which should prevent charities missing out on income following a conversion.

Any constitutional amendments which are required must be considered and may need to be completed prior to conversion, for example, changes to membership structures.

There are several grounds on which the Charity Commission may reject an application, for example, where a charity is not up to date with its reporting requirements with either the Charity Commission or Companies House.

Community Interest Companies (“CICs”)

A similar process and considerations as for a charitable company apply, but CICs are not charitable, they gain charitable status by converting. As a result, there is a requirement to show they can meet the test for charitable status. In practice this is set out in an application form to the Charity Commision, which necessarily elongates the process.

On application the Charity Commission notifies the CIC Regulator and both regulators will consider eligibility to convert. In certain circumstances the application will be declined, for example, where a winding up petition has been presented.

Community Benefit Societies (“CBSs”)

In principle a similar conversion process applies to CBSs but as all charitable CBSs are currently exempt it is not possible for them to convert until their exempt status is removed. There is no indication about when this is likely to happen and with Brexit taking up so much parliamentary time this could be delayed for an extended period.

Conversion Process for Unincorporated Charities

If an unincorporated charity wants to convert to a CIO structure the process is slightly more complicated. A review of the charity’s governing document will be required as well as a review of the particular assets held by the charity to make sure it has the power to incorporate.

There is no automatic conversion process and so the new CIO has to be set up and registered with the Charity Commission first which involves preparing a detailed registration application and satisfying the Charity Commission of its charitable status.

Once the CIO has been registered the assets and undertaking of the unincorporated charity are then transferred to the CIO. This often involves a formal written transfer agreement and in certain circumstances the consent of the Charity Commission may be required. The unincorporated charity can then be dissolved and removed from the Register of Charities. A new registration number will be generated for the CIO.

This process can be complex and professional advice is recommended to ensure all of the charity's assets are dealt with appropriately. The experts in Higgs & Sons Charity and Not For Profit team can advise charities on their options in relation to incorporation and managing the re-structuring process. Please get in touch if you would like futher information.

 

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