What is charity incorporation? Why incorporate and how? CFG's corporate partner, Russell Cooke, shares all you need to know.
Charity incorporation is a process whereby an 'unincorporated' charity, i.e. an unincorporated association or trust, changes its structure to become an 'incorporated' charity, usually a company limited by guarantee ('CLG') or charitable incorporated organisation ('CIO').
Why incorporate?
Unincorporated charities are not legal 'persons', whereas incorporated charities are, which means that:
- Unincorporated charities cannot hold property, enter contracts, or bring/defend claims in their own name; instead, trustees must do this on their behalf. This can cause complications when trustees change, eg with updating the Land Registry or novating contracts, and if the process is not managed properly assets can remain in the names of past trustees. By contrast, an incorporated charity can hold property, enter contracts, and bring/defend claims in its own name, which avoids these complications.
- If unincorporated charities cannot pay their debts, in principle their trustees (or in some cases their members) can be personally pursued for them. In practice, this may be unlikely, but the risk can make trustees uncomfortable. By contrast, an incorporated charity is responsible for its own debts: in the event of insolvency, generally the trustees are only pursued if they have acted unlawfully and the members’ liability is limited to a nominal amount or nothing.
How do you go about incorporating?
The process of incorporation broadly involves:
- Establishing a new incorporated charity, usually a CLG or CIO, including drafting a governing document and applying for registration with the Charity Commission (and Companies House for a CLG).
- Transferring assets and liabilities from the unincorporated charity to the incorporated charity. Particular processes, documentation and/or consent from third parties may be necessary. For example, the transfer of employees can engage the TUPE Regulations, and the transfer of leases, contracts or mortgages can require third party consents.
- Once the transfer completes, closing down the unincorporated charity. This is generally fairly straightforward, but there can be complications, e.g. relating to legacy income.
How do we know if incorporation is right for us?
The decision on whether to incorporate is one for the charity, taking into account its particular circumstances. Incorporation can bring significant benefits, particularly for charities with more complex assets and/or higher-risk activities. On the other hand, incorporation can be resource-intensive, e.g. you may need to establish an internal taskforce or take professional advice. Charities can carry out a cost/benefit analysis to work out whether incorporation is right for them.