The statutory framework for this new form of incorporated organisation having been created by the Charities Act 2006, the necessary Regulations to bring those provisions into operation were only approved by Parliament at the end of 2012.
The Charitable Incorporated Organisation is like a company limited by guarantee (the form of organisation hitherto most frequently used by charities) in that it affords the protection of limited liability to its members and directors and is a legal entity in its own right separate from its members and directors, but is differentiated from them in requiring only to be registered with the Charity Commission ("the CC"), and not also with Companies House. The dual filing obligation in relation to Annual Returns and Accounts is therefore avoided; all and any documents that need to be filed have only to be filed with the CC.
In order to manage anticipated workloads, the CC has agreed an implementation timetable with the Cabinet Office. The CC can adjust the dates depending on demand but at the moment:
- The CC will now accept applications for registration of new CIOs with an anticipated annual income of over £5,000.
- As from 1st March 2013, the CC will accept applications from existing unincorporated charities with annual income over £250,000 to set up a CIO and transfer assets to it.
- As from 1st May 2013, existing unincorporated charities with annual incomes between £100,000 and £250,000 can set up a CIO and transfer assets to it.
- As from 1st July 2013 the band for such applications is reduced to £25,000 and to £100,000.
- As from 1st October 2013 the band for such applications is reduced to £5,000 and £25,000.
- As from 1st January 2014 unincorporated charities with an annual income of less that £5,000 will be able to set up a CIO and transfer assets to it, and brand new charities with an anticipated annual income of less that £5,000 will be able to set up a CIO.
It is hoped that, subject to the passing of the necessary secondary legislation in Parliament, in the course of 2014 it will be possible for charitable companies limited by guarantee, Community Interest Companies and Charitable Industrial and Provident Societies to convert into CIOs. This too may need to be phased.
The most obvious advantages are:
- Limited liability, so that normally the trustees and members will be protected from personal liability. If (for example) the charity does not have enough resources to meet a claim from a creditor (bank, supplier, landlord, employee etc) then that person's claim is only against such assets as the CIO has, and not the personal wealth of the trustees or members. If the CIO is wound up, the constitution can make clear whether the members will be under no obligation to make a personal contribution to the shortfall, or what the maximum amount is that each will make (say £10).
- Separate legal personality, so that the CIO becomes the other party to any contract with landlords, employees, etc and it is not necessary to change the identity of the title holder or employer every time there is a change of trustee or member.
- The CIO will also protect the charity trustees and members where the charitable activities involve financial risks.
- The CIO can have vested in it any permanent endowment held by an unincorporated charity. This can be done by a simple vesting declaration.
- The CIO's annual return and accounts need only be filed with the CC and comply with the SORP, rather than also complying with the accounting regulations relevant to companies limited by guarantee. So a CIO with an annual income below £250,000 need only produce and file with the CC simpler receipts and payments accounts.
- The CC has produced two simple model constitutions for CIOs:
- the foundation model, where the only voting members will also be the trustees
- the association model, where the charity will have a wider membership of voting members other than the trustees. The former will be akin to an incorporated charitable trust; the latter akin to a company limited by guarantee.
- The CIO must be incorporated using one of the simple forms of constitution published by the CC (or as near to those forms as circumstances allow). It should therefore be relatively inexpensive and easy to register a CIO electronically using the CC's website. Provided there is no conflict with the constitution, it can also make its own Rules and Bye-Laws.
There are, however, some important disadvantages to be borne in mind before deciding whether to opt for this structure.
- An exempt charity cannot be or become a CIO, because all CIOs must register with the CC.
- A charity with an annual income of less that £5,000 does not have to register with the CC at all, but every CIO, irrespective of its income must register (subject to the implementation plan referred to above).
- Unlike Companies House, the CC is not operating a searchable register of charges. Although a CIO can register a mortgage on land at the Land Registry, there will be no register of any debentures issued by CIOs. Banks often require such forms of security for lending to limited liability organisations, and in the absence of a register of such charges for CIOs, it remains to be seen whether they will be willing to make advances to a CIO.
- Correspondingly it is unlikely, when the conversion becomes possible, that a company limited by guarantee which is considering converting to a CIO would be allowed to do so by any bank or other lending institution to which it had issued a debenture by way of security.
- If an existing charity is essentially a grant making charity, making grants from the income derived from its endowments, there is unlikely to be any major advantage in becoming a CIO.
- If any existing unincorporated charity is, however, providing services to the community – such as a school, or care home – then the CIO would be an advantageous way of securing limited liability for the charity trustees, and for the members, particularly since the form of incorporation documents is simple, and returns and accounts need be filed only with the CC.
- However, if the service providing charity is likely to need to issue debentures over its fixed and floating assets as a condition of receiving bank finance to fund its operations, the lack of any register for such instruments is likely to make the proposition unattractive to such a lender.
- The only advantage to a charitable company limited by guarantee (which has not borrowed monies against such security) in converting to a CIO (when the implementation plan permits) would be the marginal accounting and filing costs of filing returns and accounts only with the CC.
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.