Charities

Conversion to corporate status

Why Incorporate?

In these times of increased litigation, many charity trustees have been taking the decision to incorporate their charity to limited company status. The main advantage of incorporation is that a company is a separate legal person that can hold property and enter into contracts in its own name, thereby relieving the trustees from this responsibility.

This removes the personal liability of the trustees to perform the contractual obligations of the charity so that, for example, in the case of a charity becoming unable to make ends meet, the trustees will not be personally liable to meet any shortfall to contractors and employees from their own funds. It also makes the company rather than the trustees the target for claims by employees for breach of employment laws and negligence claims by users of charity facilities and others.

Incorporation also avoids the need to transfer ownership of property and other assets when trustees change.

Disadvantages

The main disadvantage of incorporation is the added administrative burden of complying with both the Charities Act and the Companies Act. However, this burden is not great as, for example, the same accounts can, with little modification, be used for both filing purposes.

Incorporation does not exclude charity trustees from their duties to the charity, such as the duty to act in the best interests of the charity.

Method

In simple terms, a new company limited by guarantee is created and registered both at Companies House and with the Charity Commission (assuming that its income is over the relevant threshold). Generally, the objects of the new charity will be the same as the existing charity.

The existing charity may then, assuming it has the appropriate power, pass its assets, employees and contracts to the new charity, subject to assumption of its liabilities. An asset transfer agreement will often be appropriate to record this. Often the existing charity will be dissolved. The previous policy of keeping the old charity in existence to continue receiving legacies for the existing charity has fallen away since 2007 - provided the correct details are registered with the Charity Commission, legacies for the existing charity are now automatically transferred to the new charity.

If permanent endowment involved, a variation of the above method will usually be possible.

When the Charitable Incorporated Organisation (CIO) comes into existence, hopefully in 2011, this organisation will probably be used in place of the limited company as it has the advantages of incorporation but without the need for registration at Companies House.