Nick Burrows and Laura Evans, in our Corporate & Commercial department and Charities team, explain the process and timescales involved when incorporating an existing charity (typically as a Charitable Incorporated Organisation (CIO)).
Our charity experience
We have acted for many unincorporated charities whose trustees have elected to incorporate the charity.
The range of charities for which we have acted covers relatively large service delivery charities, smaller grant giving charitable trusts, village halls, pre-schools and charities holding sports fields or similar community assets.
These charities have almost always incorporated as Charitable Incorporated Organisations (CIOs), rather than as companies limited by guarantee (CLG), and in most cases (although not in the case of the village halls) as Foundation CIOs, where the only members are those people who are also the trustees of the charity.
In some cases, however, it will be appropriate to use the Association CIO model, where there is a broad class of members or potential members of the CIO, and the CIO is run by a smaller board of trustees – in other words, the members and the trustees are not the same.
Incorporation of a company limited by guarantee (CLG) vs a charitable incorporated organisations (CIO)
Whilst it is possible still to use the vehicle of a CLG upon incorporation there is, in our experience, little merit in doing so for most currently unincorporated charities.
Whilst a CLG gives the benefit to trustees of a separate legal entity with limited liability for its members, as it is a company formed under the Companies Acts, it is also required to comply with those acts and is required to file various documents at Companies House.
Any charity which operates through the medium of a CLG will also, of course, need to comply with charity law and will be regulated by the Charity Commission as well as by Companies House.
By contrast, a CIO, whilst also being a separate legal entity with limited liability for its members, can be used only for charities, and is subject to regulation only by the Charity Commission, and not by Companies House.
Timescales when incorporating a charity
Our experience of likely timescale is that discussion of the transaction with trustees, drafting the new constitution and making the application to the Commission will typically take between 1 and 2 months, depending upon the complexity of the constitution, any unusual assets or liabilities which need to be considered, and any other relevant matters (for instance, where charities have employees, charities may want to instruct us to assist in the arrangements for the transfer of employees under the provision of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE)).
Where the current unincorporated charity has a wider membership than its board of trustees, this process is likely to take longer, as, once the trustees have decided on the appropriate way forward, this will have to be explained to, and agreed by, the wider membership, which will also need to pass a resolution to authorise the incorporation.
So far as the actual incorporation of the new CIO is concerned, whilst the Commission can often take up to six months to deal with the registration of a new charity, in our experience, where an application for the incorporation of an existing charity is properly completed, the Commission can complete the incorporation of the CIO in as little as a week.
If there are any matters on which the Commission is unclear, or about which it has concerns, then it will raise questions which will, undoubtedly, delay the incorporation.
Transfer of a charity’s assets and liabilities
The transfer of assets and liabilities can take the form of a vesting declaration, which has the effect of transferring property which has no restrictions to the CIO to be held as part of its corporate property, and to vest legal title to any permanently endowed property in the CIO to be held upon its original trusts.
We also usually use an asset transfer agreement to transfer all of the assets other than land to the new CIO and to deal with TUPE and the charity’s employees.
Stocks and shares and other investments will often need to be transferred using stock transfer forms, but we would consult with any financial advisers involved with the charity to ensure that the correct method of transfer is used for each particular type of investment.
In our experience, there are few conflicts of interest which arise upon incorporation. There is a technical potential trustee benefit issue, where the new CIO gives an indemnity to the trustees of the transferring charitable trust, and that can be dealt with by obtaining the consent of the Commission to the arrangement.
We would hope to identify any potential conflicts of interest early on in the process and would advise trustees on the application of the relevant law and on the application of the charity’s own conflicts of interest policy, if it has one.
Our charity law services
Our service for charities and trustees in relation to the incorporation of a charity covers:
- initial discussions with trustees covering the assets and liabilities of the charity;
- advice to the trustees throughout in relation to all matters pertinent to the incorporation on which we are instructed;
- agreeing with trustees the most appropriate vehicle for incorporation;
- how the assets and liabilities and any employees will be transferred to the new incorporated charity;
- drafting the constitution;
- completing the application at the Commission;
- effecting the transfer of assets and liabilities to the new charity once it is incorporated; then
- dissolving the old charitable trust once the transfer process has been completed.
For further information or legal advice, please contact firstname.lastname@example.org or call 0118 951 6800.
This article is intended for the use of clients and other interested parties. The information contained in it is believed to be correct at the date of publication, but it is necessarily of a brief and general nature and should not be relied upon as a substitute for specific professional advice.