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What are Charitable Incorporated Organisations?

Charitable Incorporated Organisations (CIO) are a new type of legal entity, designed specifically for non-profit organisations. It has filled the hole that for the last 400 years has caused other legal structures, intended for contrasting purposes, to be used to help provide charities with a practical and effective incorporated vehicle.

The creation of this new legal body will allow the organisation to have the benefits of being a company without the burdens. It was created in response to a number of requests for charities to have some of the benefits of being a company. This was due to increased pressures and concerns about the financial risks of running charities. Furthermore it allows the organisation to still be in keeping with being a charity and not a company.

Charities that have become a limited company will have realised that there is notable tension between the regulatory authorities, signifying that this structure was not initially intended for charitable organisations.

A requirement of a CIO, is that the principle office must be in England or Wales.

Key characteristics of a CIO

2.1 Single regulation and registration. CIOs are regulated by charity law and not by company law. They only need to register with the Commission, and not with Companies House.
2.2 Separate legal personality and limited liability. Like any corporate vehicle, CIOs have a separate legal personality and can contract and hold property in their own name.The liability of its charity trustees and members is limited.
2.3 Membership. CIOs must have one or more members. A CIO’s members are either liable to contribute up to a specified amount to the assets of the CIO if it is wound up or not liable to make any contribution at all)).A charity trustee can (but is not required to) be a member and the members and the charity trustees can be the same people.
2.4 Less onerous reporting and accounting requirements. CIOs do not need to prepare a directors’ report under the Companies Act 2006, just an annual report under Charities Act 2011 which is less onerous. Only one annual return has to be sent to the Commission.
2.5 No Commission charges. Unlike Companies House, the Commission does not (and currently has no plans to) charge for registration or the filing of information.
2.6 Limited transparency. The register of charities will contain details of CIOs including the date they are registered, details of their governing document and financial information. The registers of trustees and members will also be open to public inspection. However, the Commission does not currently plan to provide a publicly accessible register of details of charges over the property of a CIO.

Main benefits of becoming a CIO

A CIO allows the organisation to have the benefits of a company without the burdens. It will ensure that the organisation has legal personality, meaning that it can conduct business in its own name. Therefore a CIO will be able to enter into contracts on its own right, but trustees will have limited or no liability for the debts of a CIO, unlike those of a charity. This will ensure that the increasing pressures of personal financial risk, due to running a charity, no longer exist.

Consequently, becoming a CIO will require that they only have one regulator – the Charity Commission, allowing them to focus on their charitable work by reducing reporting requirements, for which many smaller charities have found to be an unwelcome burden. The governing document will be in the form of a constitution, which will be provided by the Charity Commission.

CIOs will have a number of further additional advantages over ordinary charitable companies, including the single registration process, simplified filing and constitution, greater flexibility and less punitive.

How are they different from other Charity Organisations?

Prior to the introduction of CIOs, charities could be registered as companies, but this meant registering with both Companies House and the Charity Commission.

Many charities used to be formed as trusts which are governed by a small group of trustees that do not have any personal protection like a CIO trustee will do.

Some organisations, who have a common purpose but no intention to make a profit, would have formed an unincorporated association, such as tennis clubs or parent associations.

Why should your charity become a CIO?

While becoming a CIO will benefit most charities, it will not benefit all charities, and the decision whether to incorporate as a CIO should be considered carefully by all parties involved. The type of charity that will benefit the most form becoming a CIO is one that:

  • is small to medium sized;
  • employs staff;
  • enters contracts; and
  • the trustees would benefit from having limited or no liability.

Other organisations with different needs may benefit more from being incorporated as a company limited by guarantee.

Registration- Foundation and Association Models

A CIO’s constitution must be in the form of one of the two model constitutions specified by the Commission in regulations, or as near to that form as the circumstances admit. While the Charity Act 2011 and the General Regulations do not require particular wording to be used for a CIO’s constitution, it is likely that any significant deviation from the model constitutions (that already have some flexibility built into them) will delay registration.

Like companies (which must have both members, i.e. shareholders, and company directors) all CIOs must have members and charity trustees. Some CIOs may want the only members to be the charity trustees, others may want a wider membership open to other people. The Commission have produced two model constitutions for CIOs:

(a) Foundation Model– the ‘foundation’ model is for charities whose only voting members will be the charity trustees. In practice a CIO using the ‘foundation’ model will be like an incorporated charitable trust, run by a small group of people (the charity trustees) who make all key decisions. Charity trustees may be appointed for an unlimited time though they can appoint new charity trustees; and

(b) Association Model– the ‘association’ is for charities that will have a wider membership, including voting members other than the charity trustees. A CIO using the ‘association’ model will have a wider voting membership who must make certain decisions (such as amending the constitution), will usually appoint some or all of the charity trustees (who will serve for fixed terms), and may be involved in the work of the CIO.

There are not two different forms of CIO. A CIO with the ‘foundation’ model could change to the ‘association’ model if it wanted a wider voting membership. (This could also happen the other way around, but members who were not trustees would be giving up their membership.)

Whichever constitution is relevant, it will have to include its name and purposes, details and liability of its members, eligibility criteria, and directions on how its property is to be applied on dissolution.

It is possible for provisions in the constitution to be entrenched, meaning that they can be changed or modified by a resolution of the members. An entrenchment must either be included in the constitution or be agreed to by all of the members.

Converting to a CIO

Unincorporated associations, charitable trusts and other forms of charity that wish to become CIOs, will first have to set up a CIO and then transfer their assets to the CIO.

Suppliers, banks and funders of the transferring charity will need to be notified of the transfer and of the new entity and it may be necessary to novate existing contracts to the new CIO. The CIO will be a new legal entity, therefore the current contracts that have been entered to by the old entity will need to be novated to the new CIO entity.

Is it right for your charity?

If you believe your charity may benefit from these changes, please get in touch today to organise a meeting and discuss the possibility of these changes to your charity.

There has been a staggered introduction of CIOs in order to keep up with the estimated demand, and we would be happy to advise you on how this would affect your charity’s next steps.

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Posted by Penina Shepherd on January 25, 2015