Constitutional dilemmas

Constitution spelt in scrabble tiles

Increasingly, it seems, on the various fora that are available to discuss charity management and governance issues, questions about constitutional models are coming up. Questions like “Should we become a CIO?”, and “Do I need to incorporate?” are common.

So I thought I’d take a look at the main constitutional formats and hopefully answer some of those questions. Mind you, a quick caveat here … I’m not a lawyer or legal adviser so check, check and check again before ploughing ahead with major change.

Deed of Trust

A charity can exist under a Deed of Trust. This is, if you like, the traditional way of doing things and is still used by many when setting up small charities; the Charity Commission provides suitable templates.

A Deed of Trust establishes things on trust, just as the name implies, and the trustees are the people who are being personally trusted to look after and manage the charity’s funds. Under a Deed of Trust, the charity is not created as a legal entity in it’s own right, so it does not exist as a body that can (for example) own property or enter into a contract. This is a serious limitation for anything other than the smallest or simplest charities, where there is no intention (for example) to employ staff (a contract). The other important thing about a charity created using a Deed of Trust is that trustees are personally liable for what happens, there is no legal entity to “carry the can”.

A common scenario is where a small (dining room table) charity is formed by a group of individuals to deliver local good, which then grows and needs to employ staff or occupy its own space. In these circumstances, it is likely to be advisable to transfer the charity’s activities and assets to another form.

Note that creating the trust and registering it with The Charity Commission are two different steps.

Company Limited by Guarantee (CLG)

In this scenario, a legal entity is created by the formation of a company, which is registered with Companies House. The “limited by guarantee” part means that each member of the company has a limited exposure to any liability, by guaranteeing to pay a fixed amount if the company is ever would up. This is typically a notional amount of a few pounds at most, and often just £1.00.

The directors of the company are the trustees of the charity, which also has to be registered with The Charity Commission. At the foot of a letter, email, or website of a charity that is a company limited by guarantee you will normally see both registration numbers. Dealing with two regulators introduces some administration but it is not particularly onerous in most cases, simply filing accounts and keeping records of director / trustees up to date, and so on. Not maintaining Companies House records can result in fines though!

The advantage of incorporating as a company is that the charity then exists as a legal entity. An incorporated body is able to employ staff , enter into formal contracts with suppliers and funders, or own property, land, and other assets. The directors/trustees still have a lot of responsibility of course, but they are not personally handling the charity’s affairs in the same way as under a Deed of Trust.

The directors/trustees of a charity that is a CLG will often consider taking out trustees liability insurance, which ostensibly protects them against any personal liability. However, in reality, a trustee is only ever likely to be deemed personally liable for any debts of the company/charity if they have been guilty of dishonesty or gross negligence, so it is debatable what value such insurance has beyond reassuring the trustees themselves.

Charitable Incorporated Organisation (CIO)

2012 saw the launch of Charitable Incorporated Organisation, often referred to as a CIO.

The CIO is a type of format for a registered charity which affords it limited liability, without having to register as a limited company at Companies House, although it is an incorporated form and so creates a legal entity.

Such a charity only has to register with the Charity Commission and not Companies House, and the organisation/entity is only created once it is registered by the Charity Commission. Because it is a legal entity, it can enter into contracts in its own right.

The CIO is regarded as the more modern form for charities, and is increasingly common because of the simplified regulatory environment and because trustees do not have any liability for the debts of a CIO in normal circumstances.

Other more specialist options

Other possibilities that could be considered in some circumstances when setting up what we might more broadly refer to as a social enterprise include:

A community interest company, known as a CIC, is a hybrid between a commercial company and a charitable company available since 2005. These are intended to facilitate and stimulate social entrepreneurship, allowing directors to receive market salaries, and investors to receive a return on their money (though capped). The assets of a CIC can only be applied directly for the objects of the company and a CIC is not automatically treated as a charity and will usually pay tax like any other company.

Co-operatives trade for the mutual benefit of their members, and Community Benefit Societies trade to benefit the broader community. Again these bodies would not be registered with The Charity Commission, although HMRC can grant charitable status and thus tax benefits.

Further reading

The Charity Commission is the authoritative source of course >> https://www.gov.uk/guidance/charity-types-how-to-choose-a-structure