UK: Corporate Structures For Charities - The New Scottish Charitable Incorporated Organisation

Last Updated: 15 April 2011
Article by Gordon Wyllie and Isabella MacRitchie

With effect from 1st April 2011, a charity in Scotland will be able to be established using the new legal form of a Scottish Charitable Incorporated Organisation (an SCIO). The SCIO will be a corporate body able to enter into contracts, employ staff, incur debts, own property, to sue and to be sued. As such, it will provide a high degree of protection against personal liability for its charity trustees. It will also provide some reassurance for those entering into contracts with it, and for creditors.

In Scotland, charities have mainly been established as unincorporated associations or as a trust; or in corporate form by way of a company limited by guarantee.

For those charities which are not corporate bodies there has been concern over the personal liability of trustees. In addition all the members are liable to contribute if the charity is wound up, including making up any deficit in the charity funding if it became insolvent. The lack of legal personality for unincorporated charities has meant that contracts are entered into by charity trustees and there is uncertainty over the enforcement of contracts with unincorporated organisations. This can make dealing with other contracting parties difficult, particularly if they will be creditors. There is no public notification of the dissolution of such organisations or their winding up which can affect the confidence of creditors dealing with these types of organisation.

The traditional solution to these issues is to choose a company limited by guarantee as the charity vehicle. This ensures limited liability for the members and, as a separate legal entity, contracts are all entered into and enforceable against the company itself. However, the significant drawback of a company is that such entities are regulated both by OSCR and Companies House and are subject to all the applicable company law. This is a considerable administrative burden on and expense for the charity and, as a result, despite the apparent benefits often only larger charities are incorporated.

The SCIO is designed to bridge this gap. It offers limited liability and has separate legal personality but is regulated only by OSCR. It has been developed primarily from charity law and OSCR is the regulator of its form as well as its charitable status. It can only exist as a charity and ceases to exist if its charitable status is lost.

Incorporation of an SCIO is by application to OSCR, submitting the proposed details of the SCIO, including it constitution. There is no specified form of constitution for an SCIO. Only a list of matters the constitution must deal with. There is no equivalent of the model articles to fill any void in the constitutional provisions.

An SCIO's constitution must state its name and its purposes and must make provision about who is eligible for membership, and how a person becomes a member. It must deal with the appointment of 3 or more persons ("charity trustees") who are to be charged with the general control of the SCIO's administration, and about any conditions of eligibility for becoming a charity trustee.

In addition it must make provision about -

  • any restrictions on its powers;
  • the organisational structure of the SCIO;
  • its procedural rules, including convening of meetings, records of meetings and the quorum for any meeting;
  • voting rights of members and of charity trustees;
  • how resolutions may be passed;
  • the processes for withdrawal and for removal of members and of charity trustees;
  • any circumstances in which remuneration may not be paid to charity trustees beyond the restrictions imposed by charity law;
  • procedures for dealing with any conflicts of interest; and
  • those purposes for which any surplus assets available to the SCIO immediately preceding its winding up or dissolution must be used.

An SCIO is registered only with OSCR and not with Companies House. It makes returns and reports changes in information only to OSCR. A company limited by guarantee registered as a charity must make filings with both Companies House and OSCR. Avoiding this dual administrative burden was a principal driver in the establishment of an SCIO.

An SCIO is not a company and is not subject to the rules of the Companies Act which apply to companies. The accounting requirements for an SCIO will be based on charity rules alone and the type of accounts required will be subject to the same thresholds as unincorporated associations. The constitution of an SCIO can be amended by a two thirds majority. An SCIO can pass written resolutions, if these are unanimous. An SCIO must have a meeting of its members once every 15 months.

An SCIO needs a minimum of two members and three charity trustees (who can also be members).

For an SCIO some of the duties of charity trustees are placed on the member, namely that in exercising their functions in their membership capacity, they must act in the interests of the charity, in particular seeking "in good faith to ensure that the charity acts in manner which is consistent with its purposes". With a company limited by guarantee only the directors have the duties of charity trustees, not the members.

An SCIO will allow smaller charities to enjoy the benefits of incorporation without the administrative burden of compliance with company law. It is expected that many charities will choose to adopt this legal form which has been developed to meet the needs and concerns of charitable organisations, and those involved with them as members or trustees. From January 2012 charities already incorporated as companies limited by guarantee will be able to convert to SC1O form.

Biggart Baillie has many years of experience in advising charities and Gordon Wyllie was a member of the Charity Law Association's working group and a consultee to the Scottish Government's SC1O working group, both of which were involved in the development of the SCIO.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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