Charities: incorporated or unincorporated?

Since late 2012 and the advent of Charitable Incorporated organisations (CIOs) as an incorporated legal form of charity, there has been a growing trend towards incorporating existing unincorporated charities (such as trusts and unincorporated members associations). Presumably this is because CIOs offer pretty much all the advantages of charitable companies (which previously had been the only incorporated form available to charities) without the complication of being subject to both charity and company law (and of dealing with two regulators - the Charity Commission and Companies House).

Our resource page on charity structures outlines the key advantages and disadvantages of each of the main options for legal form of charity. In our view, when setting up a new charity these days there is almost no advantage in an unincorporated legal form and we would almost always advise choosing a CIO (depending, of course, on the specific circumstances of the charity proposed).

The question becomes rather more nuanced when thinking about existing unincorporated charities and whether they should change to an incorporated form. The reason most unincorporated charities choose to incorporate (almost always as a CIO these days) is to reduce the risk of personal liabilities for Trustees. This can be a good reason for incorporating, not least because it can make it a little easier to recruit new trustees who may be worried about the burdens and risks that come with trusteeship. However, it needs to be balanced against the time, cost and hassle that often comes with incorporating.

In a nutshell, incorporating involves registering a new CIO, transferring assets (and sometimes liabilities) from the unincorporated charity to the CIO and closing the unincorporated charity. Sounds simple, but it can be a real hassle. For example:

• The Charity Commissions can take a very long time to consider applications for new CIO registrations and can be rather awkward about it.

• In almost every case the CIO will need to open new bank accounts and, as we’ve written previously, banks and charities often don’t mix. Moreover, if you have a lot of standing orders/direct debits set up on your bank accounts, the switch can be very time-consuming and donors could be lost.

• If your charity owns or leases land, has significant agreements/contracts in place with third parties, employs staff or has a permanent endowment then the process can be more complicated (although in the case of land, agreements/contracts and employees, this can be a particularly strong reason for incorporating in the first place - see below).

• There have been reports of funders refusing funding to newly incorporated charities because they do not have previous years’ accounts for the CIO (even though they have existed in an unincorporated form, often for decades before incorporating, and have even received grants from the same funders). This is rare, but not unheard of.

Therefore, it is important for Trustees to ask themselves the searching question, “just how significant are the risks of personal liabilities and is the benefit worth the hassle.” Is it really in the best interests of the charity to incorporate.

Where land, employees and/or significant agreements/contracts with third parties are involved our advice, while dependent on the context in each specific case, is almost always that incorporation is worth pursuing. This is because in these cases the unincorporated charity cannot own the land or enter into contracts (including employment contracts) in its own right and must do so through its Trustees personally, exposing them to much greater risk.

Even more importantly, we find that the Trustees of unincorporated charities often don’t know that they are doing these things personally and therefore do not know, for example, that when Trustees change they need to transfer ownership of land etc.

We are increasingly coming across situations where long-standing unincorporated charities have got into quite a mess because, for example, land ownership has not been transferred when Trustees have changed. In some the land is registered at the land registry as owned by people who have long since died. These are often (but not always) charities set up decades (or even centuries) ago as a result of bequests or long leases, with complex trust and management committee arrangements, sometimes amended on numerous occasions by Charity Commission Schemes. The “corporate memory” of the charity has been lost over time and professional advice has not been sought on changes, often due to lack of funds or simply because Trustees did not know it was needed.

Incorporating charities that own the land, employ people and/or have significant agreement/contracts with third parties is, therefore, desirable both to mitigate risks to Trustees and to ensure that land and assets are owned by the charity itself (not held on trust personally by the Trustees), thus removing the need to transfer land ownership when trustees change. The result is usually a much simpler and more future-proofed governance structure that is far less likely to run into these types of issues.

Overall, our view is that incorporation is often a sensible step to take but Trustees should consider the pros and cons carefully before deciding to incorporate. Where land, employees or significant third party contracts/agreements are involved, even thigh the process will be more complicated, the advantages will more often than not out-weight the downsides.

To find out more about incorporating charities or the wider range of governance support and training we offer, please contact us at julian@almondtreeconsulting.co.uk to arrange free initial telephone discussion.