This page contains information that has appeared on Sandy Adirondack's legal update website for voluntary organisations at www.sandy-a.co.uk/legal.htm. For current updates, including potential changes that are in the pipeline, see the legal update website.

These websites for each chapter update the 3rd edition of The Russell-Cooke Voluntary Sector Legal Handbook by James Sinclair Taylor and the Charity Team at Russell-Cooke Solicitors, edited by Sandy Adirondack (Directory of Social Change, 2009). The websites are not intended as a comprehensive update and should not be treated as such.

To order a copy of The Russell-Cooke Voluntary Sector Legal Handbook, print out the order form at www.sandy-a.co.uk/bookserv.htm or send an email order by clicking . It costs £60 for voluntary organisations or £90 for others, plus 10% p&p.

Chapter 3
INCORPORATED ORGANISATIONS

COMPANIES HOUSE LONDON CHANGE OF ADDRESS

Added 6/6/12.
From 21 May 2012 the Companies House information centre in London has moved to Companies House, 4 Abbey Orchard Street, London SW1P 2HT.

The telephone number for all Companies House centres (Belfast, Cardiff, Edinburgh, London) remains 0303 1234 500, and the email address remains enquiries@companies-house.gov.uk.

Go back to contents
Go to archived items about companies (VSLH3 chapter 3)

COMMUNITY INTEREST COMPANIES REGULATOR WEBSITE

Added 12/6/12.
Since June 2011, the website of the community interest company (CIC) regulator has ceased to be on the Companies House website, and is on the website of the Department for Business, Innovation and Skills at www.bis.gov.uk/cicregulator. The website contains information about CICs, guidance and forms for setting up a CIC, and case studies.

There is no longer a separate list of CICs, as was on the previous CIC regulator's website. Information about individual CICs remains available through the Companies House webcheck service at www.companieshouse.gov.uk.

The CIC regulator's annual report for 2010-11, published in November 2011, showed that during the year 1,824 CIC were added to the register, seven converted to charitable companies and 484 were dissolved. Over the six years from July 2005, when CICs became available, to 31 March 2011 5,899 CICs were registered, 977 were dissolved and 17 converted to charities, leaving 4,905 on the register on 31 March 2011.

The regulator's annual reports can be accessed via tinyurl.com/6rrrb84.

Go back to contents
Go to archived items about companies (VSLH3 chapter 3)

CHARITABLE INCORPORATED ORGANISATIONS

Legislation, guidance and information
The statutory framework for CIOs was in the Charities Act 2006 but has now been consolidated in part 11 (ss.204-250) of the Charities Act 2011, at www.legislation.gov.uk/ukpga/2011/25/part/11.

The detail is in the Charitable Incorporated Organisations (General) Regulations 2012, at www.legislation.gov.uk/uksi/2012/3012/contents/made;
the Charitable Incorporated Organisations (Insolvency and Dissolution) Regulations 2012, at www.legislation.gov.uk/uksi/2012/3013/contents/made;
and the Charitable Incorporated Organisations (Consequential Amendments) Order, at www.legislation.gov.uk/uksi/2012/3014/contents/made.

For detailed information about CIOs, the most comprehensive source is Key guides: Charitable incorporated organisations by Gareth G Morgan (£19.95 plus p&p from www.sandy-a.co.uk/bookserv.htm, the Directory of Social Change, bookshops or online booksellers). This covers all aspects of CIOs and Scottish CIOs.

Setting up a CIO: New charities and existing unincorporated charities
At present, the Charity Commission is registering only brand new charities as CIOs, or currently unincorporated charities wishing to become CIOs. An existing unincorporated charity sets up a CIO by registering it with the Commission, then the process is similar to changing from an unincorporated trust or association to a charitable company: because the CIO or company is a complete new organisation, all of the assets, rights and liabilities of the unincorporated charity must be transferred to the new one.

In most cases the unincorporated charity is then dissolved in accordance with the provisions in its governing document (constitution, trust deed etc), and the trustees of the unincorporated charity apply to the Commission to have the unincorporated charity removed from the register of charities and added to the register of mergers. There are, however, situations where it may be necessary or advisable to retain the unincorporated charity alongside the CIO, and advice should be taken about this.

Converting from charitable company or other incorporated structure to CIO
CIO regulations will contain procedures for charitable companies limited by guarantee, community interest companies with charitable objects and charitable community benefit societies (industrial and provident societies) to convert to CIOs. The process will be fairly straightforward, as it involves converting from one incorporated structure to another so will not involve a transfer of assets.

It was expected that the necessary regulations would be before Parliament by the end of 2013 setting out the conversion procedures for charitable companies, and conversion would become available sometime during 2014. This has been continuously delayed, and the regulations are now not expected until late 2015 at the earliest.

Procedures for conversion from community interest company (CIC) to CIO will follow. Charitable community benefit societies (CBS) are currently exempt charities and cannot register with the Charity Commission, so they will not be able to convert to CIO status until their exempt status is removed. There is no indication yet of when this might happen. Depending on when the conversion processes are going to become available, a CIC or CBS that wants to become a CIO sooner rather than later may want to consider converting first to a charitable company, then to a CIO when conversion from charitable company to CIO becomes available.

Until the statutory conversion process becomes available, an alternative for existing incorporated organisations which want to become CIOs is to set up a CIO, transfer the existing organisation's assets to it, and probably wind up the existing organisation. This process, involving the transfer of assets from one incorporated body to another, is more complicated than conversion under the CIO regulations will be, but can be done now. Advice should be taken before starting such a transfer.

Some commentators have said that regardless of whether the change is done by transfer or conversion, some lenders whose loans are secured on a company's or community benefit society's assets might not allow the organisation to become a CIO, because of the lack of a publicly available register of charges. For more about this see Borrowing, below.

CIO constitutions
The Charities Act 2011 requires all CIOs to have both members and trustees. But the foundation model constitution allows for a CIO in which the members and trustees are the same people, and the association model is for a CIO where there is, or is expected to be, a body of members wider than the trustees. The basic provisions are the same in both constitutions but there are significant differences, so it is essential to ensure a proper decision is made about whether the CIO will be an association CIO or foundation CIO, and to use the right constitution.

After the constitution is adopted and the CIO is registered it will be possible to amend a foundation model constitution to allow for a wider membership, if this becomes appropriate in future. It will also be possible to amend an association model constitution to cease having a membership wider than the trustees, but this would have to be approved by the members, who may not be willing to cease being members.

The Commission's association and foundation model constitutions are at tinyurl.com/o2qrhvy. The notes at the beginning of the draft constitutions explain with admirable clarity what a CIO is, how to use the model constitutions, and the process for becoming a CIO.

The Charities Act 2011 and CIO general regulations set out certain provisions that must be in all CIO constitutions, and other provisions that have to be included if they are to apply to that particular CIO. In addition to these, the Commission has included other provisions which reflect good practice or the law.

An organisation registering as a CIO without taking specialist advice should use one of the models. This will speed the registration process, and will ensure the constitution includes all legally required information.

However, every clause in the model should be checked to be sure it is appropriate for your organisation. In addition, if you are setting up a CIO to replace an existing charity, the model clauses should be checked against the provisions in the existing governing document. Where there are substantive differences these should be considered, and decisions should be made about whether the current provisions should be carried over into the CIO, and if so, how to do it in a way that does not lead to endless correspondence with the Charity Commission during the registration process. This is why it is sensible to take advice from a council for voluntary service, other infrastructure support organisation, solicitor or specialist advisor who specialises in setting up charities, rather than trying to set up a CIO on a do it yourself basis.

Some umbrella bodies for specific types of organisation have agreed approved CIO constitutions with the Charity Commission. These have been adapted to be appropriate for that type of organisation. A list of national organisations which can provide approved government documents is on the Commission's website at tinyurl.com/ofjy9p3, but the website does not indicate whether the the organisation has an approved model for CIOs. If a relevant umbrella organisation is listed, it will be worth contacting them to see if they have agreed, or are in process of discussing, an approved CIO constitution. [This also applies when setting up a charitable association, trust or company — not just a CIO.]

The Charities Act 2011 s.206(5) requires a CIO's constitution to be in the form specified by the Charity Commission (i.e. one of the model constitutions or an approved constitution), or as near to that form as the circumstances admit. Some flexibility is built into the models, but trying to tailor the models to the specific needs or wishes of an individual organisation is likely to cause delays in the registration process. The Commission has said it will be flexible in interpreting "as near to that form as the circumstances admit", but it can never be anticipated what this may mean in practice. Again, taking advice while drawing up the draft constitution is likely to reduce time and hassle during the registration process.

Whether doing a DIY registration using a model constitution, using an approved constitution from an umbrella body, or taking specialist advice to create a bespoke adaptation of the Commission's model, all variations from the model or approved constitution should ideally be clearly indicated. This is because the Commission, as part of the registration process, has to ensure no changes have been made that would invalidate the constitution or make it unworkable. The more changes that are made — especially if they are made without specialist advice — the longer the registration is likely to take.

Unfortunately the CIO model constitutions, like the Commission's model governing documents for charitable associations, trusts and companies, are available only as PDFs that cannot be edited online, so they have to be printed out and adapted manually. For the CIO models it is now possible to fill in blanks online (name, objects etc) but other details cannot be added, amended or deleted online. The Commission has been saying for years that it is looking into formats that can be completed more easily than the current PDFs, and hopefully will come up with something better than just being able to fill in a few blanks.

Some provisions which apply automatically under company law (such as the right of members to remove company directors/trustees) apply to CIOs only if they are explicitly included in the CIO's constitution; others which cannot apply to companies (in companies formed since 2007, a chair cannot have a casting vote at company meetings) can apply to CIOs if included in their constitution. So when drawing up a CIO's constitution it is important to think carefully about each clause, and to consider the options set out in the side notes in the models. Some constitutional provisions which I think are of particular interest are included in CIO: Yes or no? below.

CIO: YES OR NO?

Decisions when starting from scratch
When setting up, all new organisations must decide:

• whether to be charitable (and get the tax and other benefits of charitable status, but have to operate within the restrictions of charity law), or non-charitable (and miss out on the tax and other benefits, but have more flexibility);


• whether to be unincorporated or incorporated;


• if unincorporated, whether to be an unincorporated association (a membership body, generally with two tiers: the members of the organisation, and the members of the governing body), or a trust (with only the governing body, without a wider membership);


• if incorporated, whether to be a charitable incorporated organisation (CIO), a charitable company limited by guarantee, or a community benefit society. The community benefit society structure (a form of industrial and provident society) is not widely used and is not considered here.

Deciding whether to incorporate
New organisations need to decide whether to be unincorporated or incorporated. Existing unincorporated organisations which are thinking of becoming CIOs need to decide whether to stay unincorporated or become incorporated.

Incorporation makes an organisation a "legal person". This enables the organisation to enter into contracts and other legal agreements as a body, rather than as individuals acting on behalf of an unincorporated organisation. Incorporation makes it easier to enter into contracts, leases etc and to own property, and greatly reduces the risk of members of the governing body being held personally liable if the organisation cannot meet its financial obligations.

Incorporation — as either a charitable incorporated organisation (CIO) or a charitable company — is therefore likely to be the sensible choice for any new charity or existing unincorporated charity which has or is likely to have employees, own property, borrow money, enter into significant contracts to purchase or provide goods or services, or have long-term financial commitments such as a lease without an easy get-out clause.

An unincorporated organisation cannot simply become incorporated. It must first set up the incorporated organisation (CIO or company), then transfer its assets to the new organisation. The original organisation is then generally dissolved and ceases to exist. The process for incorporation is basically the same regardless of whether the new organisation will be a CIO or charitable company, except that a CIO registers only with the Charity Commission, while a charitable company registers first with Companies House and then with the Commission.

There is more about the choice between unincorporated and incorporated charities in the Charity Commission's CC22 Charity types: How to choose a structure, at tinyurl.com/nfrvebd.

More detailed information about the choice between unincorporated and incorporated is in chapters 1-3 of The Russell-Cooke Voluntary Sector Legal Handbook.

Choosing between CIO and charitable company
New charities and existing unincorporated charities that have decided to incorporate basically have a choice between the traditional charitable company structure, or the new charitable incorporated organisation (CIO) structure. In addition, existing organisations that are already incorporated as a charitable company, community interest company or community benefit society (industrial and provident society) may want to consider whether, when it becomes possible to convert to a CIO, whether it is more advantageous to keep their current structure or convert.

When comparing CIOs with charitable companies, the immediate response is often that CIOs must be better, because there is only one registration (with the Charity Commission, rather than with both Companies House and the Commission), only one regulator, only one body of law, only one set of accounting regulations, only one annual return. But it may not be quite so simple, and some of the statutory or practical differences between charitable companies and CIOs may, for some charities, make charitable companies a better option.

Before CIOs became available, the Office for Civil Society said it expected the CIO structure to be used mostly by charities with annual income between £10,000 and £500,000. Those under £10,000 — or larger but without paid staff, premises or long-term financial commitments and not undertaking risky activities — are likely to be too small to need the protection (and extra paperwork and hassle) of incorporation. Unless they own property or a long lease, or have identified risks that would make incorporation sensible, it may be appropriate for them to remain unincorporated. Those over £500,000 — or smaller if they are likely to need to borrow or if they have or might have a mortgage — may find a charitable company more appropriate than a CIO [see borrowing, below].

In some cases it will be clear that a CIO is not necessary (at the lower income end) or advisable (at the upper end). But for many organisations it may not be clear cut, and the best decision may emerge only after weighing up a wide range of variables, many of which are set out below.

It is important not to get pushed into choosing — or not choosing — the CIO structure, unless it really does seem to be the best choice. At the moment a CIO, unlike other legal structures, cannot convert to any other structure. Lord Hodgson's review of charity law in 2012 recommended that CIOs should be able to convert to charitable companies, but this cannot be relied upon to happen.

The information below should help organisations choose wisely between CIO and charitable company, and to understand some of the issues when drawing up a draft governing document (CIO constitution or company articles) and going through the registration process. Where a particular issue may be critical to the decision, I have indicated this.

1. Registration and legal compliance

1.1 Registration body
Summary: Advantage to CIO. A CIO registers only with the Charity Commission, and must comply with general charity law as well as charity law requirements specific to CIOs. A charitable company registers with both Companies House and Charity Commission, and must comply with general charity law as well as company law requirements.

1.2 Familiarity
Summary: Advantage to company. Even though CIOs have been in existence since January 2013, the CIO structure is still relatively new, untested, and unfamiliar to funders, banks and others. This will change over time — but in the meantime, charitable companies have been around for a long time and are well understood by funders etc.

1.3 Cost
Summary: Advantage to CIO, but probably only in relation to the cost of preparing annual accounts, plus a small advantage in relation to statutory filing costs.

1.4 Transferring assets from an existing unincorporated charity
Summary: Advantage to CIO. The process of transferring assets from an unincorporated charity to a CIO is more comprehensive than for transferring to a charitable company.

1.5 Speed of incorporation (may be a critical issue)
Summary: Advantage to company. A company can be registered at Companies House within a week or even on the same day, and comes into existence as soon as it is registered. A CIO does not come into existence until it is registered with the Charity Commission, which could take several weeks.

1.6 Speed of charity registration
Summary: Advantage to CIO. Once a CIO is registered with the Commission, it has both its incorporated status and its charity registration. A company, after registering with Companies House, then has to register separately with the Commission.

1.7 Very small charities
Summary: Advantage to CIO.

HODGSON RECOMMENDATIONS ON CHARITABLE INCORPORATED ORGANISATIONS

Updated 25/5/13. This information updates s.3.2 in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
In his review of the Charities Acts presented to Parliament on 16 July 2012, Lord Hodgson made the recommendations below in relation to charitable incorporated organisations.

My comments are in italic.

• The impact of CIOs should be assessed three years after implementation [Chapter 10 organisational forms recommendation 3].


• The regulations which will allow charitable companies, community benefit societies (industrial and provident societies) and community interest companies to convert to CIOs should be expanded to include enabling CIOs to convert into charitable companies [Chapter 10 organisational forms recommendation 4].
  Sandy's comment: The CIO structure may not be appropriate for charities that will need to borrow [see CIO: yes or no?]. This recommendation would allow a CIO that has outgrown the structure to convert to a charitable company.


• The rules governing CIOs should be changed to reflect updates to company law, to the effect that a 75% majority is required to make constitutional changes or a resolution to transfer assets outside the context of a meeting (i.e. by written resolution) [Appendix A recommendation 31].
  Sandy's comment: This and the recommendation below on constitutional changes would remove two of the disadvantages of CIOs as compared to companies [see CIO: yes or no?].


• Legislation should be amended so that constitutional changes to CIOs take effect immediately, provided any necessary Charity Commission prior approval has been obtained. There should be a requirement for subsequent notification of any changes to the Charity Commission [Appendix A recommendation 32].

Go to list of all of Lord Hodgson's recommendations

COMPANIES ACT 2006

Updated 13/1/11. This information supplements s.3.3 and updates various sections in The Russell-Cooke Voluntary Sector Legal Handbook (VSLH3).
The Companies Act 2006 was implemented in seven tranches from January 2007 to October 2009. Information about the changes and lists of all the new Companies Act forms, are at www.companieshouse.gov.uk.

Provisions which have come into effect since mid-2009 are listed below. Unless indicated otherwise, the changes apply in the same way to charitable companies and community interest companies as to ordinary companies limited by guarantee.

Memorandum and articles

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