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CLGs, trusts and more — find the right form for your charity

Originally published: January 2017 | Last reviewed: January 2017

From the tiny volunteer-run community group to the international NGO employing thousands of staff, charities can look very different.

In the UK, a number of legal structures are available to accommodate this variation — and choosing the right one is important. It affects how your charity will operate: such as who'll run it, the ability to sign contracts and hire staff, and whether the trustees take on personal liability for what the charity does.

In England and Wales there are four main options (each of which don't usually have to pay income tax, corporation tax, capital gains tax or stamp duty, once recognised as charities by the HMRC):

  • Charitable company limited by guarantee (CLG)
  • Charitable incorporated organisation (CIO)
  • Unincorporated association
  • Trust

Which one you choose depends on whether you want a corporate structure and whether you'll have a wider membership (where, for example, members vote on important decisions) or the trustees will make these decisions.

The legal structure will also be defined by your governing document — the legal document that determines how your charity is run. You'll need to draw this up with your chosen structure in mind.

Corporate structure for charities

In most cases, a corporate structure limits personal liability of the individuals involved. It also gives your charity the legal capacity to do many things in its own name, such as employing paid staff, entering into commercial contracts in its own name and owning land.

There are two main types of corporate structures:

Charitable company limited by guarantee

Charitable CLGs have directors (who act both as company directors and as trustees) and are subject to both company law and charity law (regulated both by Companies House and the Charity Commission). But, as the Charity Commission sets out, they're unlike commercial companies in that:

  • They can't distribute surpluses to their members
  • They can apply their assets only to carry out their charitable purposes
  • They must operate in a way that's in the best interests of the charity

CLGs are popular among charities and can be set up with or without a wider membership (in the sense that the directors/trustees can be the sole members). They're also used by non-charities, including social enterprises.

To set up a charitable CLG, you first need to register a CLG with Companies House, although the CLG's constitution needs to comply with requirements from both Companies House and the Charity Commission. You then need to apply to the Charity Commission to register the organisation with charitable status.

Charitable incorporated organisation

CIOs were created in 2012 as an alternative to CLGs for charities, offering limited liability and a sole regulator (the Charity Commission). In Scotland, the equivalent is the Scottish Charitable Incorporated Organisation (SCIO).

CIOs can work both for wider membership and more focused membership: an association CIO if you have a wider membership, including voting members other than the charity trustees, or a foundation CIO if the only members are the trustees and you don't want a wider membership.

Both types of CIOs, according to the Charity Commission, require you to:

  • Have a constitution as your governing document, using the Charity Commission's model (though some modifications are allowed)
  • Register your CIO with the Charity Commission for it to legally come into existence (and, for example, to start employing staff or sign a lease)
  • Keep a register of your trustees (and members, if relevant)
  • Send your accounts and annual return to the Charity Commission each year, regardless of income

Unincorporated charities

An unincorporated charity can be set up easily, but has certain restrictions. For example:

  • Trustees are personally liable for what the charity does
  • The charity can't enter into contracts or control certain investments in its own name (meaning these contracts and investments must be signed by individual trustees in their own names)
  • The charity can't own land in its own name (so you'll need to appoint separate "holding trustees" or apply for the Official Custodian for Charities to hold the land on the charity's behalf)

Unincorporated association

This is the structure to choose if you want your charity to have a wider membership but you don't need a corporate structure. This is often used by charities, but also some noncharities (such as sports clubs). One risk of this model is that the liability that trustees take on for the charity could in some cases extend to the charity's members. Arguably, however, the introduction of the CIO model means there's now less need to take the risk of choosing the unincorporated association structure (since the CIO limits personal liability but without the burden of dual regulation).

Trust

A trust works for a charity that doesn't need a corporate structure or a wider membership — for example, if you're unlikely to employ a significant number of staff or your work is entirely or nearly all in grant giving.

Community Interest Company and other legal options

One noncharitable option is the Community Interest Company (CIC). This is a relatively new legal structure (created in 2005) to accommodate the growing number of social enterprises in the UK. By 2016, some 12,000 organisations were registered as CICs. This could be an option if your organisation wants to earn a significant portion of income by trading (although charities may also create trading subsidiaries).

Assets owned by a CIC are held in an asset lock that secures those assets to applications for the good use of the community. Broadly there are two types of CIC: one limited by guarantee and one limited by shares. The CIC limited by guarantee has no shareholders and therefore can't pay dividends. The CIC limited by shares does have shareholders and can pay dividends, but CIC-specific legislation limits the amount of dividend that can be paid to shareholders. This is in order to strike a balance between encouraging people to invest in a CIC, and ensuring that a reasonable proportion of its assets and profits are used to benefit the community.

Other legal structures used by charities, though less frequently, include:

  • Community benefit society
  • Co-operative society

Legal structures for charities — more resources

There's plenty more help out there to guide you through the different legal structures and which one is best for your organisation. Some starting points include guidance and tips from charity specialists such as Law Works, legal firms such as Interface Legal Advisory Service or Bates Wells Braithwaite, or organisations such as Knowhow Nonprofit and the Resource Centre.

The Resource Centre provides an overview of the advantages and disadvantages of each, summarised here:

Charitable company limited by guarantee

Advantages:

  • Offers a separate legal identity that enables entry into contracts in its own right (for example, hiring staff and leasing or owning property)
  • Provides limited liability for trustees
  • May be more likely to get a bank loan than a CIO (since a CLG is obliged to keep a public record of its liabilities)

Disadvantages:

  • Regulated by both Companies House and the Charity Commission
  • Must notify both Companies House and the Charity Commission of every change of directors/trustees and submit annual accounts and reports to both
  • Payments apply to register as a company and to submit annual accounts and reports, with fines for late submissions
  • Obliged to keep accruals accounts, regardless of organisation size (which is more complex than "receipts and payments" accounts, meaning potential higher costs)

Charitable incorporated organisation

Advantages:

  • Offers a separate legal identity that enables entry into contracts in its own right (for example, hiring staff and leasing or owning property)
  • Provides limited liability for trustees
  • Free to register a CIO and no fines for late submissions to the Charity Commission
  • Accounts can be kept on a "receipts and payments" basis if annual income is less than £250,000

Disadvantages:

  • Lengthy registration process
  • Possible difficulty getting loans from banks (since a CIO isn't obliged to keep a public record of liabilities)
  • Relatively new legal form, so some grey areas are possible

Unincorporated association

Advantages:

  • Simple and flexible to set up, and inexpensive to operate
  • No need to comply with regulatory bodies if aims aren't charitable
  • If aims are charitable, still no need to register with any external organisation if annual income is less than £5,000
  • If annual income is less than £25,000, reports to the Charity Commission are short and accounts don't need independent examination

Disadvantages:

  • No separate legal existence, which places responsibility or liability (for example, for debt) on the individuals involved
  • Can't hire staff or rent premises in the name of the organisation

Trust

Advantages:

  • Fairly cheap and simple to set up

Disadvantages:

  • No separate legal existence
  • All decisions are made by trustees, so unsuitable for a group wanting to encourage a large and active membership

Changing your charity structure

Changing to a different charitable structure usually involves setting up a new charity, transferring your original charity's assets and liabilities to it, and then closing your original charity. This can be complex, particularly if your charity has assets. For detailed information, see the official guidance.

A common cause for changing is when an unincorporated charity decides to become incorporated. This is particularly the case, according to legal firm Bates Wells Braithwaite, when the organisation grows or begins to take on more risk or, for example, wants to take on a lease, buy a freehold property, hire employees or seek a loan.

Expert input and advice for this article was provided by Interface Legal Advisory Service, which specialises in providing low-cost and user-friendly assistance to charities and other nonprofits.

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Disclaimer

MissionBox editorial content is offered as guidance only, and is not meant, nor should it be construed as, a replacement for certified, professional expertise.

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References

Charity Commission: Charity types: how to choose a structure (2014)

Red Zebra Community Solutions: Legal structures for organisations with charitable purposes

Companies House: Company registration and filing: Starting a company

Law Works: Setting up a CIO (2016)

OSCR: Scottish Charity Regulator: SCIO (Becoming a charity)

SCVO: Scottish Charitable Incorporated Organisation

GOV.UK: Community Interest Companies

Law Works: Charity structures (2016)

Bates Wells Braithwaite: Working out your legal form

Bates Wells Braithwaite: Get Legal - decision tool

Resource Centre: Finding a legal structure to suit your group (2016)

Knowhow Nonprofit: Introduction to legal forms (2016)

Charity Commission: Changing your charity structure (2014)

Bates Wells Braithwaite: Why incorporate/benefits of incorporation

References

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