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Setting up a charity: Which structure should you choose?

Not-for-profit organisations come in all different shapes and sizes, with unique objectives and funding arrangements. This means that, when choosing a legal structure for your enterprise, there is no one-size-fits-all solution.

The structure that you adopt will determine how your venture operates, so getting it right can save you a lot of time and effort in the long-run. Though, that isn’t to say that you can’t change your structure later as this is also an option.

The four main structures

As a charity, you will typically identify as one of the following; an unincorporated association, a trust, which is also unincorporated, a Company Limited by Guarantee or a Charitable Incorporated Organisation.

• A trust – is typically run by a small group of appointed ‘trustees’ and is relatively simple and inexpensive to establish. 

• An unincorporated association – is a membership organisation ideal for small groups, perhaps run by volunteers. Whether the group is charitable or not depends on the presence of charitable aims and who benefits.

• A Company Limited by Guarantee (CLG) – is a limited liability company, incorporated and registered at Companies House. Income is not distributed amongst shareholders, meaning a CLG can be not-for-profit if all surplus income is reinvested into the organisation.

• A Charitable Incorporated Organisation – is an incorporated charity. CIOs must register with and report to the Charity Commission, regardless of income, but need not register with Companies House. Members have limited liability and it also has its own legal personality.

The rise in popularity of the CIO – is it right for you?

The Charitable Incorporated Organisation was launched in 2013 to combine the benefits of a charitable organisation and a company. It is one of two corporate structures available, with the other a CLG.

Corporate structures often prove popular thanks to the limited liability protection that they offer, alongside greater legal freedoms.

CIO’s have grown in popularity since their introduction and since January 2018 when charitable companies were allowed to convert to this structure. There are a number of advantages to CIOs, that CLGs do not possess – for example:

– CIOs are only regulated by the Charity Commission meaning no dual administrative requirements;
– two types of CIO – foundation and association – accommodate charities with focused/wider membership;
– there is no minimum income threshold for registration;
– there is no charge to register with the Charity Commission; and
– the vast majority of company law does not apply.

On the other hand, to exist as a charity the CIO must have had their application accepted by the Charity Commission, which can take up to 45 days.

Converting to a CIO has proven more challenging than expected. This, alongside lack of public education prevents CIOs from being perceived in the same altruistic light as a charity.

In addition, just as the Commission has the power to incorporate charities, they can also dissolve them. If a CIO loses its registration, it will cease to exist.

What if I want to convert to a CIO?

First, consider why it is that you want to convert; whether the risk that unlimited liability carries, or the administrative burden associated with dual regulation. Based on your objectives, consider the options available to you and choose the structure that fulfils your requirements. The Charity Commission says the CIO structure is beneficial for small to medium-sized charities which often employ staff and enter into contracts.

Converting to a CIO (or any structure for that fact) should not be done on a whim as it can be a complex process. Many of the undertakings involved cannot proceed until the Charity Commission approves the CIOs registration. This can lead to delays in getting the new organisation up and running. As with any big decision in business, doing your research and obtaining professional advice where necessary is vital.

Here at George Hay, we understand that to respond to the challenges associated with today’s economic climate, charities are having to take a long hard look at their plans for the future. That’s why our specialist team support the not-for-profit sector, providing audit, independent examination reports, accounting, taxation and advisory services to charities, academies, clubs and social enterprises of all sizes.

We can assist you with everything from appraising and strengthening governance procedures to setting accounting policies, and from providing ideas for diversification to helping you identify an efficient structure for your venture. To find out more about how we can help charities and not-for-profit organisations, click here.

You can also read the Charity Commission’s guidance on changing the structure of your charity, here.

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