In our previous blog we explored the different types of charity merger and the processes involved in implementing a merger, a process also usually involved in charity incorporations.
In our experience, over the last few years more and more unincorporated charities (i.e. trusts and unincorporated members’ associations) have incorporated. As our explanation of charity structures on this website sets out, there are four main legal forms of charity: Trusts and Unincorporated Associations and unincorporated and Charitable Incorporated Organisations (CIO) and Companies Limited by Guarantee (CLG) are incorporated
The main advantages of CIOs and CLGs are that they have their own, separate, “legal personality”, which means that many (but not all) Trustees’ personal liabilities are reduced or removed and the charity can enter into contracts, leases etc. in its own right rather than the Trustees doing so on its behalf. A fuller exposition of the advantages of disadvantages of different forms of charity is provided on our charity structures page.
How to incorporate?
With the exception of converting a Charity Company to a Charitable Incorporated Organisation, the process of changing the legal form of a charity almost always involves a “Unified Full Takeover” merger, where a new, incorporated form of charity is registered, then the assets (and sometimes liabilities) of the existing unincorporated charity are transferred to the new charity and then the unincorporated charity is wound up. Therefore, a unified takeover merger is almost always involved when incorporating a charity.
Whether to create a CIO or CLG depends on the reasons for incorporating (e.g.a CLG may be preferable if the charity wishes to borrow money) but either way a unified takeover merger is almost always involved.
Things to watch out for
Incorporation will almost always, therefore, involve a change of “legal personality” for the charity. A new charity number will be created for the new incorporated charity. When the old unincorporated charity is closed the public register will only show it as “removed” meaning that the financial history on the Charity Commission website that funders often use in their due diligence will no longer be available
This change of legal personality will affect all the agreements the Trustees have entered into on behalf of the unincorporated charity, including employment contracts and pension arrangements, leases/licences to occupy, funding agreements and contracts, supplier terms and conditions etc. Care will, therefore, need to be taken to identify all of these and make arrangements either to terminate them and for the new charity to enter into new ones or to “novate” (transfer) them to the new charity. In the case of employment contracts, compliance with the Transfer of Undertakings Protection of Employment (TUPE) Regulations will be important.
The change of legal personality will also often (but not always) mean that new bank accounts need to be opened and old accounts closed (a process that these days can take many months).
Other important process issues include:
Making sure that if the agreement transferring the assets from the unincorporated to the incorporated charity provides any indemnities to the Trustees of the unincorporated charity, the liability under those indemnities is limited to the value of the assets transferring.
Getting the Charity Commission’s consent prior to the transfer of assets if, as is usually the case, there is a significant overlap of Trustees between the new incorporated charity and the old unincorporated charity.
Making sure the “merger” involved in the incorporation is registered on the Charity Commission register of mergers (rather than applying to have the old unincorporated charity removed from the register of charities). Registering the merger will in any case remove the old charity from the register of charities but it will also ensure that the incorporated charity is recognised (e.g. for legacy bequests) as the successor to the unincorporated charity.
This might all sounds like a lot to deal with. For some larger, more complex charities, it is. For small, simple charities (who often have no (or very few) staff, no property and no contracts) the only issue that tends to arise is the commonly arising need to change bank accounts, and that is usually a question of time (and hassle) rather than anything more fundamental.