Non-profit legal structures
Which non-profit legal structure works best?
CIC, company limited by guarantee, CIO, registered charity, company limited by shares, Cooperative Society and Community Benefit Society are just a few of the bewildering array of options available as legal structures for non-profits.
What do these mean?
Which is the right one for your budding social enterprise?
Getting it right at the start is really important. It is usually difficult and expensive (or even impossible) to change structure later.
Back in 2020, in partnership with the British Library Business and IP Centre, our Director, Julian Lomas, presented a free webinar on the subject of choosing the right structure for a social enterprise. Julian is a qualified expert in the governance of not-for-profit organisations, including social enterprises, with over 15 years’ experience advising clients in this field.
In this one hour webinar, Julian sought to demystify the issue of choosing the right legal structure for a social enterprise (or non-profit), including:
- explaining the key features of the main options;
- exploring the pros and cons of each; and
- explaining how structures can (or cannot) be changed
You can view a recording of the webinar here and download the slides here. The presentation is about half an hour and then Julian took questions for a further 30 minutes.
We also zero in on some of the key choices for legal structures in our blogs, for example exploring the value of CICs and explaining what is a community amateur sports club (CASC)?
The rest of this page explores perhaps the most common question we get asked, what are the legal structure options available for charities?
Charity legal structures
There are four main legal forms for charities:
A Trust
An Unincorporated Association
A Charitable Incorporated Organisation (CIO)
A Company Limited by Guarantee (CLG)
The sections below summarise the main advantages and disadvantages of the four main forms available
These factors should all be considered when deciding what form of charity to choose when establishing a new charity.
From time to time Trustees of existing charities should also consider whether their governance arrangements are fit for purpose, including whether it is the right form of charity. In some circumstances it is possible to convert from one form of charity to another. For example, it is relatively common to convert from an unincorporated form (Trust or Unincorporated Association) to an incorporated form (CIO or CLG), to take advantage of the added protection incorporated forms offer Trustees. However, for many reasons this is not always the best option and it usually involves setting up a new charity, transferring assets from the old charity to the new charity and then closing the old charity. In general, there are limited advantages in changing between incorporated forms.
If you require further advice on any of the issues raised in this guidance note or any other aspect of charity governance, including collaborations, consortiums and mergers, please contact us.
Disclaimer
Choosing or changing the legal form of a charity can be complicated and decisions should always rest on your specific requirements and circumstances. This note sets general information and does not constitute formal advice (legal or otherwise) to any specific existing or proposed organisation or charity on its legal form. Bespoke advice, including legal advice where appropriate, should be obtained before such decisions are made.
Trust
Governing document: Trust Deed or Will
Advantages:
Generally simple and inexpensive to set up.
Can use simple receipts and payments accounts.
One regulator – the Charity Commission.
Disadvantages:
Generally no protection from liability for the Trustees (beyond insurance cover).
Cannot have members who have a formal role in governance.
Must have over £5,000 a year income to register as a charity.
Has no legal personality of its own and therefore contracts are entered into by the Trustees.
Unincorporated Association
Governing document: Constitution
Advantages:
Generally simple and inexpensive to set up.
Can use simple receipts and payments accounts.
Can have members who have a formal role in governance.
One regulator – the Charity Commission.
Disadvantages:
Generally no protection from liability for the Trustees (beyond insurance cover).
Must have over £5,000 a year income to register as a charity.
Has no legal personality of its own and therefore contracts are entered into by the Trustees.
Charitable Incorporated Organisation
Governing document: Constitution
Advantages:
No minimum income requirement to register as a charity.
Can use simple receipts and payments accounts (if gross income is less than £250,000 a year).
Trustees generally have no or limited liability for the debts of the CIO.
Can have members who have a formal role in governance.
Has its own legal personality and can enter into contracts in its own right.
One regulator – the Charity Commission.
Disadvantages:
Must use accruals accounting if gross annual income is over £250,000 a year.
A CIO does not come into existence until it is registered by the Charity Commission.
There is no register of charges for a CIO as there is for a company, which may be important if you want to borrow money.
Company Limited by Guarantee
Governing document: Articles of Association (if formed before Sept 2009, Memorandum & Articles of Association)
Advantages:
Trustees (Directors) generally have limited liability for certain liabilities.
Can have members who have a formal role in governance.
Has its own legal personality and can enter into contracts in its own right.
The Charity Commission advises that a CLG will be a better option if your charity is likely to want to issue debentures (or bonds).
Disadvantages:
Often more complicated and/or expensive to set up (and operate) – a CLG comes into existence when registered by Companies House but must subsequently register with the Charity Commission.
Must have over £5,000 a year income to register as a charity.
Must use accruals accounting no matter how much income it receives.
Two regulators – the Charity Commission & Companies House.