Meet our Expert

Cameron, Lucy JohnsonLucy Johnson-Cameron – Associate at Arnold & Porter (UK) LLP

Lucy is a solicitor specialising in corporate transactions at Arnold & Porter. Lucy advises clients on a wide range of transactions including public and private M&A, capital markets, venture capital investments and corporate restructurings.

 

 

 

“I am setting up a charity, and am a little torn on which legal entity to go with. There is the new CIO or the Limited company by guarantee (with charitable purpose). I realise there are lots of pros and cons to both. But what is the final word on the benefits of a CIO?”

 

The answer

Background

A company limited by guarantee is a company without a share capital and is used mostly in the not-for-profit sector. The law considers a company to have the same legal status as a person. This means that a charitable company, like an individual, can own land and enter into contracts it its own name. These charities also have limited liability for debts or lawsuits. This means their members or trustees are generally only responsible for a limited nominal amount, usually £10.

The Charity Commission (“CC”) began registering charitable incorporated organisations (“CIOs”) for charitable activity from January 2013. CIOs are similar to companies, in that it has the same legal status as a person. This means it can enter into contracts in its own name and its trustees and members generally have limited or no liability for the charity’s debts. However, CIOs are not companies and do not have to register with Companies House, only with the CC. A CIO does not exist until it is registered with the CC, and once a CIO is accepted by the CC for registration its details are entered in the register of charities. There are two different types of CIO: Foundation CIOs and Association CIOs.  The only voting members are also the trustees in a Foundation CIO, whereas for an Association CIO the voting membership is wider than its trustees. The constitution of a CIO must be in a form specified by regulations made by the CC, and the CC has published model constitutions for both types of CIO which should be replicated in as near to that form as the circumstances permit, as registering a CIO with a tailor-made constitution is likely to cause a delay in its registration.

Advantages and Disadvantages

There are some benefits in choosing a CIO as the type of structure for a charity, as well as a number of disadvantages as set out below.

Advantages

  • In contrast to the requirement for a company limited by guarantee to have a minimum income of £5,000 for it to register with the CC, there is no minimum registration threshold to register a CIO.
  • The CIO is a separate legal entity and so it can enter contracts, hold property and employ staff in its own name. Consequently, any liabilities arising from the entry into such arrangement fall on the organisation itself rather than the trustees. Companies limited by guarantee have a similar benefit.
  • Trustees of CIOs benefit from limited liability, as do directors of companies limited by guarantee, which is limited to the amount they have invested in the CIO or have guaranteed upon the winding up of the CIO.
  • On begin entering onto the register of charities, a CIO is automatically given a registered charity number which facilitates correspondence with HMRC on charitable tax advantages and also serves to reassure potential funders and donors.
  • CIOs do not have to register with Companies House and only need to be registered with the CC. As a result, CIOs are not required to file information at Companies House but file information with the CC, which, in contrast to Companies House, does not charge for the registration or the filing of information.
  • The reporting and accounting requirements in the Companies Act 2006 do not apply to CIOs, rather charity law applies. CIOs are only required to report to and file accounts, an annual return and other documents with the CC.
  • CIOs which have a gross income of less than £250,000 in any financial year may use the simpler receipts and payments basis to prepare its accounts.

Disadvantages

  • Unlike a company limited by guarantee, a CIO does not exist until it is registered with the CC and the CIO’s details are entered in the register of charities.
  • There can be a delay in registering a CIO with the CC, as it takes up to 45 working days for the CC to process applications, especially if the CC has follow up questions in relation to the application. Companies limited by guarantee, on the other hand, can be incorporated relatively quickly and range from being incorporated the same day (for an additional fee) to approximately 5 working days.
  • In the event a CIO loses its registration at the CC it will cease to exist. Companies limited by guarantee may lose charitable status, but continue to exist as companies registered with Companies House.
  • The CIO structure is not open to all types of charities, and exempt charities (as set out under charity law) cannot be CIOs.
  • The structure is still relatively new and may be seen as unfamiliar to funders and donors.
  • Companies limited by guarantee can benefit from simplified filings if they are deemed to be small companies whereas CIOs are required to submit information to the CC regardless of size.
  • It is likely that CIOs will be unable to take on secured borrowing as the CC does not have the ability to establish or maintain a register of charges over CIO property. Lenders, therefore, are reluctant to grant CIOs secured debt.

Is a CIO or a company limited by guarantee the right structure for your charity?

Although the new CIO structure does impose regulation and registration requirements, the CC states that the new CIO structure should appeal to medium-sized unincorporated charities which employ staff and or enter into contracts. A CIO is halfway between an unincorporated association and a company limited by guarantee. The Foundation CIO provides a suitable structure for a charity that is to be run entirely by its trustees. The Association CIO provides a suitable structure for a charity that wishes to have a separate voting membership participating in the governance of the charity and providing a layer of internal scrutiny and accountability over the trustees. A Foundation CIO should be easier to administer than an Association CIO.

The CIO structure offers important benefits of having separate legal personality and trustee limited liability, and can be seen to be cheaper and easier to set up and administer than a company limited by guarantee. A company limited by guarantee remains a recommended structure for large charities which intend to have flexibility to enter into secured borrowing arrangements and raising secured debt due to the lack of a searchable charges register in connection with CIOs. Both companies limited by guarantee and CIOs have members and trustees, which makes then viable options for charities which are seeking to establish a parent-subsidiary structure. Establishing a CIO may prove attractive to large charities wanting to establish a subsidiary charity to carry out fundraising activities. One particular structure is not a generic ‘right one’. The advantages and disadvantages of each structure must be considered, and the future activities and aims of the charity should be balanced with the potential upsides and downsides of a particular structure.