Partner Article

Charitable Incorporated Organisations

With Watson Burton LLP Law Firm

The Charities Act 2006 introduced a new legal form of incorporation which is designed specifically for charities, the Charitable Incorporated Organisation (CIO).

At present, charities can be set up with a corporate structure with limited liability but this means that they must adhere to the requirements of company law as well as charity law. In particular, this means that they have to register both with the Charity Commission and with Companies House, providing accounts and returns to each regulator.

A CIO will just be registered with the Charity Commission and will have the advantage of a corporate structure without the burden of dual regulation while crucially allowing the trustees to have the protection of limited liability status.

Although charities can already achieve limited liability status by incorporating as a charitable company limited by guarantee, ‘guarantee companies’ are governed by the Companies Acts and critics have argued that most company legislation is designed for profit-making enterprises and does not therefore sit comfortably with the principles of charity.

The key features of CIOs are:-

• the CIO structure is available exclusively to registered charities (including charities which have registered voluntarily, but not exempt charities)
• the CIO is a corporate body with a legal personality separate from its members
• members of CIOs may be liable to contribute to the assets of the CIO if it is wound up (as with guarantee companies which provide for a nominal sum) or alternatively they may have no such liability. This will be the choice of the charity
• the CIO must have a written constitution

The assets of CIOs will be held for the benefit of the community. Therefore, profits and/or assets will not be distributed for the benefit of the CIO’s members. A choice of formats will be available to accommodate organisations of all sizes.

Adopting the structure of a CIO will also bring several operational advantages to a charity, including less onerous requirements for the preparation of accounts. The general procedures under the Charities Act 1993 will apply. Therefore small CIOs will be able to prepare receipts and payments accounts, whilst larger charities will need to prepare accruals accounts. Further, there are less onerous reporting requirements; CIOs will only need to prepare an annual report under the Charities Act 1993.

The Commission intends to produce model forms of constitution for CIOs which will include fewer fixed governance provisions than is currently the case with companies. Charities who are considering the prospects of merger with another organisation formed for the same or similar charitable purposes may wish to consider the structure of a CIO, since the Charities Act 2006 contains a number of provisions designed to facilitate mergers and reconstruction.

There will be codified duties for members which reflect the charitable nature of the CIO and EC company law directives will also not apply.

It is anticipated that following the introduction of anticipated secondary legislation, CIOs should become available towards the end of 2009. Although the Charities Act 2006 sets out the proposed legal framework for CIOs, more details are to be introduced in the form of Regulations which will be put forward by the Minister for the Third Sector.

Before the Regulations could be implemented, the Office of the Third Sector issued draft Regulations for consultation, along with a draft model constitution, towards the end of 2008 and the collated responses are currently being considered.

Once CIOs have been introduced, existing charitable companies, charitable industrial and provident societies will be able to convert to CIOs should they wish to do so.

If you have any queries relating to this article please contact Claire Pringle on 0191 244 4222 or e-mail claire.pringle@watsonburton.com.

This was posted in Bdaily's Members' News section by Ruth Mitchell .