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Conversion to corporate status

Why Incorporate?

In these times of increased litigation, many charity trustees have been taking the decision to incorporate their unincorporated charity to limited company or CIO (Charitable Incorporated Organisation) 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 such as claims for breach of health and safety laws; 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 as a normal limited company 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. This disadvantage does not apply to CIOs but a CIO may not be the best option if the charity wishes (or may wish in the future) to have secured borrowings.

Although not strictly a disadvantage, 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, for conversion to limited company status, 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. In the case of a CIO a new CIO is registered with the Charity Commission. The appropriate constitution will need to be selected.

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 in accordance with its constitution and the Charity Commission notified. 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 is involved, a Charity Commission Scheme will usually be required in the case of a limited company because it cannot hold permanent endowment outright. This is not the case for a CIO.

If you have an enquiry in relation to conversion to corporate status or simply want to speak to a member of our expert Team for further information and guidance, please use the request a call back or make an enquiry option to get in touch.

 

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