Adding to the mix

This year a new structure will be added to the mix, aiming to bring a corporate framework and charitable objectives together: the charitable incorporated organisation (CIO). In its sweeping modernisation of 400-year-old charity law, the Charities Act 2006 set out the foundation for the CIO, the first legal structure of its kind created specifically for charities.

“An incorporated charity is a legal entity in its own right and acts like a person in law,” explains Low, who contributed to the draft Charities Bill. He is convinced of the advantages: CIOs will have the same limited liability as a company but will only report to the Charity Commission, filing one set of accounts and one annual report.

The Office of the Third Sector (OTS) promises single registration will bring fewer reporting requirements and simplify the administrative load. Unlike Companies House, the Charity Commission makes no charges for registering and filing information. CIOs will not share a framework with commercial bodies, making constitutions simpler and more flexible, and governing documents easier to write. Duties of members and directors will be codified in line with charitable, not company objectives.

Trustees also stand to benefit. The trustees of an unincorporated charity face personal risks, owning property in their name and accepting liability for any legal action taken against the charity.

“The person who wants to sue could choose one trustee or choose them all,” says Ralph Coyle, head of charities at Rollits, a law firm. “You can take out trustee insurance but it can be expensive and has not really been tested yet.”

In an increasingly litigious culture liability is not easily dismissed. Low cites the example of the Diana, Princess of Wales Memorial Fund, which found itself in a sticky position when it was sued by a US souvenir manufacturer for £14 million in 2003. As an unincorporated body, its trustees faced having to meet the damages themselves. As such, Coyle agrees that becoming a CIO could make it easier to recruit trustees but stresses “it won’t happen overnight”.

Charity mergers, which are complicated, will also be easier, says Low. “If the charitable objectives were close it would be possible to merge two CIOs much more easily [than at present].”

So far, so promising. But there are drawbacks. While the concept of a company is globally understood, CIOs are unknown and untested. “There will be issues about a new bespoke structure. The CIO will not be understood outside the UK,” says John Stewart, head of legal at The Wellcome Trust, the medical research charity. With an international investment portfolio worth £15.7bn, persuading foreign banks they are dealing with a legally valid organisation would be more difficult, he says.

For unincorporated charities, adopting the structure will also mean more paperwork. “The CIO is still a company structure which is a lot more involved than a simple trust with a simple constitution,” explains Jane Hobson, head of policy at the Charity Commission.

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The process

The conversion process may also be a turn-off. “For large charities with highly sophisticated operations and accounting processes [complying with company law] is not a big issue,” Stewart says.

There is still an element of stargazing as to what the process will involve. This spring, the OTS is set to publish draft regulations for public consultation. However, charities won’t know the exact detail of what the process will involve until the final secondary legislation is made available in the summer. The Charity Commission is currently working on model governing documents.

“[The process] is intended to be as easy as we can make it,” says Hobson. “If you’re already set up as a company then you’ll be able to convert in a fairly straightforward way.”

Kevin Curley, chief executive of the National Association for Voluntary and Community Action (NAVCA), is in favour of CIOs, but predicts the process will be laborious. “There’s a lot of rather tedious work involved. We would have to amend the memorandum and articles, inform members, not to mention the cost of holding a general meeting.”

Unincorporated charities will have to set up a new CIO from scratch. “You have to transfer the assets and wind up the charity,” the Wellcome Trust’s Stewart says. “For charitable companies it is easier because you are already in a corporate form.”

What’s it really good for?

The consensus is that the CIO will be generally good for unincorporated, medium-sized charities. Some exempt charities such as larger religious charities will have to register for the first time this year, so becoming a CIO could prove logical, Stewart says.

Rollits’ Coyle goes further. “Any charity that is [also] a company should be considering converting. They will have less administration going forward and they will be dealing with the right sort of regulator.”

Very small charities need not worry – the main areas of liability are around contracts, property, investments and employees. “The CIO will not be appropriate for many of our members,” Curley says.

The Commission’s Hobson agrees. “If you’re a small grant-giving charity with few trustees and small endowments, or a neighbourhood organisation run by volunteers, then you probably don’t need the burden [of being incorporated].”

Word on the street

A Rollits’ poll at a recent conference found that 70 per cent of charities were planning to convert, and the NCVO reports significant interest. But speak to many in the sector and the response is lukewarm. “I think everyone is waiting to see what everyone else does first,” says a spokesman for a major disability charity.

Larger charities are unconvinced that becoming a CIO will offer any real advantages and seem wary of foregoing their company status. Cancer Research UK and The Guide Dogs for the Blind Association have no plans to convert, nor, as a Royal Charter, does the NSPCC.

Stewart says it is unlikely that The Wellcome Trust will convert, but intends to study the regulations in detail. “It’s always possible [the CIO] could one day be made mandatory,” he says. The Charity Commission says it has no plans for this at present.

Smaller charities are more enthusiastic. Hope for Children, an unincorporated charity that helps disadvantaged children in developing countries, has grown considerably since it was founded in 1994. With three employees, no property or contracts and only small scale trading, its risks are manageable. But since income passed the £1 million mark this year, it has decided to revamp its constitution and is interested in what the new structure offers.

“[Becoming a CIO] would allow us to consider other ventures,” says Simon Jackman, Hope for Children’s chief executive. He says there is a 70 per cent likelihood of converting. “It will depend on what’s in the small print. But the headlines look good.”

NAVCA, itself a medium-sized charity, plans to convert this year. Curley says: “At the moment we have dual status. It wastes money. On the grounds of making better use of charitable funds we will convert to the CIO.”

Despite this, the Charity Commission still has work to do if it is to convince the sector of the benefits of the new structure. Hobson, though, is not concerned by the lacklustre response. “People need to know more about it,” she says. “When they see the model governing documents they will be able to see how it will work for them as an organisation.”

While the final details have yet to be ironed out, Low calls the move to streamline structures a “very positive step”.

Hobson agrees. “This is the first tailor made structure which recognises what charities are for and how they work. It’s a marker of the importance which society holds charities in.”

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