"Charity begins at home, but should not end there."
Charities come in all shapes and sizes, ranging from small charitable trusts to large international funds. They exist for the public benefit, but the scope of activities and membership is extremely broad. Although no single designated structure prescribes how charitable organisations should be established, it is essential when embarking on a new charitable venture that potential trustees critically evaluate the benefits and disadvantages of the various types of charitable entity before deciding which is the most appropriate.
Why does it matter?
The type of structure will regulate how a charity operates, who can run it and whether it will have a wide or narrow membership base, how many members it has and whether it can own property or enter into contracts in its own name. A trustee looking to set up a new charity will need to carefully consider the activities and resources available, its purpose and complexity, whether it will have volunteers or employees, and the likelihood of it applying for grants or undertaking fundraising activities.
Options for larger charities
Incorporation of a charity can ensure limited liability for charity’s trustees is limited; the charity assuming its own personality. This will be an especially important consideration for larger charities, as incorporation can ensure that contracts of employment can be entered into and property acquired in the charity’s name, allowing it to employ a greater number of employees and enter into larger contracts without the trustees assuming too much responsibility or personal liability.
The most common corporate structure opted for by trustees looking to limit their liability, which enables the charity to assume its own legal personality is a charitable company. A company with charitable objects, in contrast to a commercial company, cannot distribute surplus funds to its members; charitable companies are commonly limited by guarantee, rather than shares. Whilst administratively this structure carries a comparatively high burden, needing to be registered both with the Charity Commission and at Companies House and submit multiple filings, this is often a suitable structure for larger charities. It should be noted also that although the trustees’ liability is limited, trustees of charitable companies must assume and comply with their duties both as trustees and those applicable to directors under the Companies Act 2006.
Alternatively, it may be that the relatively new Charitable Incorporated Organisation (CIO) structure is more appropriate. A CIO is an incorporated charity regulated by the Charities Commission. The liability of trustees and members is limited, and accordingly this form has some of the benefits of being a company whilst avoiding some of the administrative and filing burdens affecting companies registered at Companies House. It is likely that this relatively new charitable structure will gain in popularity
Smaller charities, trusts and community benefit societies
A charitable trust may be the most appropriate structure if the charity is unlikely to employ a significant number of employees or enter into many contracts. The voting membership can be small, limited to a few trustees and the administrative and regulatory burden is less onerous than for an incorporated body. The downside is that the trustees would have unlimited personal liability, and any property, whether freehold or leasehold, will be owned in the names of the trustees, and not separately in the name of the charity itself.
If a charity had previously been run as a trust, but the trustees would like to limit liability, it has recently been possible to register as a Foundation Charitable Incorporated Organisation, being an entity run solely by its trustees with limited liability and regulated by the Charities Commission.
Another option for smaller charities could be to form an unincorporated charitable association. These structures are not discrete legal entities, and the set up and running costs are cheaper. Charities looking to operate with a small membership base may favour this type of structure, however as with charitable trusts, they carry the danger of unlimited trustee liability.
Community benefit societies (the new name for industrial and provident societies) are, by contrast, corporate bodies with limited liability, regulated by the Financial Conduct Authority. The liability of the members is limited to the share capital of the society, and its members are governed by its rules. Such societies may only undertake activities which further their charitable objects. Furthermore, all community benefit societies must ensure that they have an asset lock, whereby any residual assets left after dissolution are transferred to charities with the same or similar objects. This is commonly the structure chosen by housing associations. Community Interest Companies must also have an asset lock, however by contrast these limited liability companies cannot be charities. Instead, they must pass a ‘community interest test’, and use their income and profits for the benefit of the community.
Once trustees have decided to adopt a particular type of charitable structure, the process of drafting the constitution and governing document can begin which will stipulate how the charity operates, and the charity will need to be registered with the appropriate governing bodies.
Charitable Trust
- Governed by a trust deed
- Flexible as with little regulatory burden
- No separate legal personality
Community Benefit Society
- Registered with the Financial Conduct Authority
- Has a legal personality which is separate to its members
Community Interest Companies
- Registered with the Registrar for Community Benefit Companies
- Limited by either shares or by guarantee
- Must pass Community Interest test
Charitable Incorporated Organisation (CIO)
- Must have a constitution in the form specified by the Charities Commission
- Two types:
- Foundation CIO
- Association CIO
- Both have their own legal personality
- Regulated by the Charity Commission to which it must send an annual return and accounts, regardless of income.
Charitable unincorporated association
- No prescribed form of constitution
- Unlimited liability of trustees
Charitable company limited by guarantee
- Regulated by both the Charity Commission and the registrar of Companies at Companies House
- Has its own legal personality
- Constitution known as articles of association
- Liability is limited by shares or by guarantee