Legal/Finance
with Richard Sims, of Gardner Leader
Richard Sims, a solicitor at Gardner Leader, answers questions on the Charitable Incorporated Organisations, the new legal framework for charities
n How are charities formed presently?
Historically, charities (unless they are unincorporated associations) have had to become either trusts or companies. Neither model has proved to be ideal, as they were created for entirely different purposes.
n What’s wrong with being a trust?
Nothing in itself. Trusts work very well for some charities, especially those without a large membership. However, some charities with a traditional trust structure face increasing concern over liability for its trustees.
n What about a company?
Those large or medium size charities which have adopted the limited company structure, find themselves faced with a dual regulatory burden, having to report to both the Charity Commission and Companies House. This includes having to file two sets of accounts. They also have to get to grips with the complex rules governing the relationship between a company and its members. One of the reasons many charities become a company, is the belief that the trustees themselves will be given limited liability protection. This is not the case. Trustees continue to risk personal liability where they fall below the standards required of a Trustee, where they breach their fiduciary duty, or where they fail to comply with either charities or company law.
n What’s the new set up?
Since the 1990s, parties of various political views have been talking about reforming charitable structures. This was finally achieved in the Charities Act 2006. For the first time, charities have their own bespoke legal framework, known as Charitable Incorporated Organisation (CIO).
n What advantages are there over other structures?
Firstly, the charity does not have to worry about Companies House and can deal solely with the Charity Commission. This means only filing accounts in one place. Also, they can operate under a simplified constitution, unlike a company. At the same time, they are legal entities and can enter into contracts in their own right. Finally, the regulations are less punitive and CIOs are not penalised for the misconduct of their trustees.
n Are there any downsides?
It is relatively early days for the CIO, therefore the waters are largely untested and few charities have been brave enough to take the plunge. One obvious difficulty is that, if a CIO ceases to be charitable, it will not have an alternative structure to fall back on, so it is unclear what will happen to the assets. It is likely that they will have to be distributed to another charity. In a small number of cases, a company structure may still be more suitable, for example, if a large charity wants to issue debentures. If in doubt, you should seek legal advice.
n Are there different types of CIOs?
The CIO comes in two forms: Foundation and Association. In the Foundation model the trustees and members are the same people. In the Association model, better suited to large organisations, there is a body of trustees and a separate group of ‘ordinary’ members.
n I’m an existing charity. Is it possible to convert?
Yes, but only if you are a company, rather than a trust or an unincorporated association. Even then, you should question whether it is worthwhile. First, the CIO will need to be established, then all the assets transferred, before the old charity is wound up. This can be a complex process and you should seek legal advice. Some charities, such as religious organisations, have had to register for the first time, and the CIO may prove useful for them.
Richard Sims is a member of the Charity Law Association and a solicitor at Gardner Leader, which tonight launches its Charities & Schools Group. Richard will be joined by the actress Alexandra Bastedo and other guest speakers, at a seminar and reception at Shaw House. If you are involved with the running of a charity and would like to attend, or if you have any other questions, please email r.sims@gardner-leader.co.uk
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