The long awaited Charitable Incorporated Organisation (CIO), the new legal form for charities became available in January 2013. The first CIOs – including The Better Way To Be Foundation, established by BWB partners for their own charitable giving - were registered on 2 January 2013.
The concept of the CIO was first introduced in the Charities Act 2006 but implementation was delayed whilst a raft of statutory instruments setting out the detail of how CIOs will work, were finalised.
What is a CIO?
The CIO is a bespoke incorporated legal form for charities. A charity can choose an unincorporated form (such as a trust or an unincorporated association) or an incorporated form (typically a company limited by guarantee). Incorporated charities have their own legal personality – they can enter into legal relationships in their own name – and their trustees have better protection from personal liability for the charity’s debts than the trustees of unincorporated charities.
Up until now, the most common incorporated legal form for a charity has been the company limited by guarantee. However, charitable companies limited by guarantee must comply with dual regulation from the Charity Commission and Companies House, which some find burdensome. They are also subject to company law, as well as charity law, in relation to their governance arrangements.
CIOs only need to register with the Charity Commission and comply with charity law, which will cut down on red tape for trustees.
What does this mean for me?
This was a very exciting development, but the CIO will not be for everyone.
What are the main pros and cons?
The main advantage of a CIO is the limited liability afforded by an incorporated form, alongside the lower administrative burden associated with being regulated by the Charity Commission alone, and not by Companies House. The CIO is the only bespoke legal vehicle for charities, and has been designed with charities in mind: there is often a feeling that charities can be hamstrung by the constraints of company law – not for profit guarantee companies represent a very small proportion of the companies registered at Companies House.
In some instances, the CIO may be more flexible than a charitable company limited by guarantee: a CIO constitution can allow for decisions at meetings to be by consensus, for example. The regime for electronic communications with members is also less rigid than the regime which applies to charitable companies. And smaller CIOs can prepare receipts and payments accounts, while smaller charitable companies must prepare accounts on the accruals basis.
However, CIOs are as yet untested and for this reason some may wish to wait and see how they “bed down”. While charitable companies can take advantage of the backdrop of company law, there is a completely new legal regime for CIOs, and grey areas are bound to emerge.
There are also benefits to being a company which may be important for larger charities with more complex financial arrangements. CIO legislation makes no provision for the maintenance of a register of charges, which may make it more difficult for a CIO to borrow as a lender will not be able to obtain the protection of registering a charge at Companies House.
There are also some significant differences between a CIO and a company in terms of governance. For example, company law also confers certain absolute rights on its members, in a way that the CIO regime does not. Company members have automatic rights to receive accounts, call meetings, vote by proxy, demand a poll and remove a trustee: a member of a CIO will have none of those rights unless the constitution expressly provides them. Similarly, whilst a company can change its constitution with a written members’ resolution of 75%, a written resolution for a CIO must be unanimous.
Anyone establishing a new charity should certainly consider whether a CIO might be an appropriate vehicle. Smaller charities are likely to find the protection afforded by a limited liability entity, coupled with the lower administrative burden, a real advantage. New charities which plan to hold significant assets, or borrow funds, may still prefer a corporate form. The Cabinet Office has assumed that the target market for CIOs will be charities with incomes of between £10,000 and £500,000.
Existing unincorporated charities which are seeking to incorporate may also wish to consider the CIO as an option. Again, limited liability, without the need to file paperwork with Companies House, may be attractive to smaller charities.
Existing companies limited by guarantee already have the advantage of limited liability. The main advantage of the CIO is the less burdensome regulatory and administrative regime. However, at present, there is no statutory procedure by which existing charitable companies can convert to CIO status. The part of the legislation which provides a framework for conversion is not yet in place.
BWB can advise further on the suitability of the new legal form for your own charity and on the steps which are needed to set up a CIO. Only time will tell whether 20% of existing charities will adopt the new structure – as estimated by the Cabinet Office – but it is certainly an enormously significant development.
During 2013, the Charity Commission operated a staggered timetable for registration of CIOs, but since January 2014 all brand new and unincorporated charities may apply for registration as CIOs, regardless of income.
Posted on 03/03/2017 in Legal UpdatesBack to Knowledge