Charitable Incorporated Organisations (CIOs)
What is a CIO?
Charitable Incorporated Organisations or CIOs are a relatively new legal structure available for charities or charitable groups that wish to be incorporated. It can be picked instead of the hitherto process of registering as a charity and then as a company.
CIOs have been designed specifically for charities, allowing them to register just once with the Charity Commission as an
incorporated form of charity which is not a company. This cuts out the need to register with and report to Companies House.
Reduced administrative burden is proposed as just one of the benefits of becoming a CIO. In addition to this, the CIO would have its own legal personality and so can enter into contracts in its own right rather than in the name of individual trustees. Trustees will also have limited liability.
CIO members still have key rights in law and under the Constitution and trustees are still responsible for managing the organisation (note that trustees for CIOs will only be trustees, they will not have the dual role of Company Director).
The policy paper for CIOs stated that ‘The CIO will add to the range of legal structures which charities can choose to adopt, and is expected to be a popular legal structure, particularly for small to medium sized charities.’ This is because, an organisation can register as a CIO without having any income. To become a registered charity – under the previous regime - an organisation must have £5000 income, which meant that small organisations could not receive a charity number – a ‘catch 22’ if a funder will only fund registered charities! The CIO form provides a registered number with the Charity Commission but does not have the income threshold, allowing for smaller organisations who need a ‘number’ to gain funding.
2,016 CIOs were registered in 2014, making up 41.4% of all charity registrations in England and Wales during the year. Since CIOs were first registered on 2 January 2013, 17,000 CIOs have been registered, as at the end of May 2019.
Now in its eight year, the CIO legal form is dispelling early concerns that small organisations, especially those with income of under £5000, will find the process an added administrative burden, through the need for all CIOs to register with the Charity Commission and then to fill out annual returns and accounts regardless of income. It was also felt that it would make setting up a new charity more difficult, as CIOs only come into existence once registered with the Charity Commission and this could take upwards of 40 working days.
Having its own legal personality should make it easier for CIOs to hold property and enter into contracts, however, it has been argued that the legal framework surrounding CIOs does not currently support the registration of mortgages over a CIOs land and buildings, an issue that could make securing lending arrangements difficult. In addition, the Charity Commission does not maintain a public register of charges which may affect charities wishing to borrow money.
Of course, there are always pros and cons no matter which legal form an organisation takes, and with CIOs in the early stages it is difficult to know where problems will arise. It is a positive step having a legal format made specifically for charities (although for many it might seem strange that Companies House and the Charity Commission did not simply come up with a joint registration procedure):
1. Incorporation - Yes
2. Limited Liability - Yes – for members & trustees (if in breach of trustee duties can still be personally liable)
3. Governing document -Constitution (certain provisions prescribed by Charities Act 2011): must keep as close to template as possible. Legal guidance will be needed to make any big changes.
Constitution outlines the rules for governance of the CIO including:
Membership and trustees
Optional to require members to contribute funds (normally £1) if CIO is wound up
Legal duty for members to act in good faith when exercising their powers
CIO law for certain governance procedures (e.g. proxy voting and communications to members) are very flexible (unlike for companies)
No explicit provision for trustee indemnity
No amendments are valid until the CC approves them and it is currently unclear what amendments will be acceptable.
4. Can register as a charity -Yes – this is a charity but with incorporation so there is no need to register as a charity as well. A CIO does not come into existence until registration is complete and charity is entered in the register of charities.
5. Sources of finance available -Grants, Contracts, trading, crowdfunding, fundraising events etc.
6. Regulator -Charity Commission only
7. Members-Yes – Foundation or Association. No members guarantee
8. Income requirement -No minimum income requirement
9. Converting to CIO -Yes – unincorporated charities or charitable trusts or CICs Charitable companies are also able to convert to a CIO, see information below.
10. Merger -Easy to merge CIO’s together.
No information regarding merging with a non-CIO
11. Insolvency -Insolvency laws apply
The Pros and Cons of CIOs
Need only register with Charity Commission
Need only comply with Charity Law
Limited liability for trustees and members
Legal personality - enabling it to conduct business in its own name, rather than the name of the trustees
Suitable for small to medium sized organisations which employ staff and/or enter into contracts - simpler than establishing a charitable company
Charities can transfer the ownership of any trading subsidiary company to the CIO.
Flexibility, for example, CIO constitution can allow for decisions at meetings to be by consensus
Regime for electronic communications with members is also less rigid than the regime that applies to charitable companies i.e you can email all members without receiving permission first.
Members of a CIO will not have rights to receive accounts, call meetings, vote by proxy, demand a poll and remove a trustee unless the constitution expressly provides them.
Smaller CIOs can prepare receipts and payments accounts (under £250,000 annual income), while smaller charitable companies must prepare accounts on the accrual’s basis.
CIO can only change its written constitution with a written members resolution unanimous vote rather than 75% as a company
Provides more choice when looking at legal structures
Reduced red tape
Simpler transfer of permanent endowment
Able to generate income in all the ways a charity can
Not as straight forward as running an unincorporated association or a charitable trust
Not assuitable for charities wanting to issue debentures
Does not come into existence until registered with the Charity Commission–therefore you cannot open a bank account etc. in itsname until it is fully registered
Cannot be an exemptcharity
Submissionof accounts and registers-for groups under£5,000 may involve alot more work
May not besuitable for large/complex charities
CIO legislation makes no provision for the maintenance ofa register ofcharges- may make itmoredifficult to borrow.
A CIO mustsubmit annual returnsandaccounts to the CharityCommission regardless of income
Possibly adds more confusion when looking at legal structures
Law is gradually becomingfamiliar but untested currently
Charity Commission funding cuts leading to staff cuts.
Funders gradually becoming familiar with the structure
The four main types of legal charity forms:
Trustthe governing documentis a trustdeed ora will. Thereis no protectionfromliabilityfor the trustees.
The governingdocumentis a constitution or rules and thereis usually a membership. Thetrusteesareoften referred to asthe management committee. Again, there is no protection fromliability for thetrustees.
Company Limited by Guarantee / Incorporated
The governing document isa memorandum and articles of association foracompanyformedbefore September 2009 andarticles of association for a companyformed sincethen. The trustees (or directors) are protected in most circumstancesagainst contractual liabilities. Charitablecompaniesmust register withCompanies House and,usually, withthe Charity Commission.
Charitable Incorporated Organisations (CIOs)
The governing document is a constitution. The trustees will be protected in most circumstances against contractual liabilities. CIOs only register with the Charity Commission.
Cabinet Office: https://www.gov.uk/government/policies/making-it-easier-to-set-up-and-run-a-charity-social-enterprise-or-voluntary-organisation/supporting-pages/charitable-incorporated-organisation-a-new-structure-for-charities
Charity Commission Guidance: Change Your Charity Structure https://www.gov.uk/guidance/change-your-charity-structure
If you would like any support with setting up an organisation, please contact WEWN Team through our website: www. wewn.co.uk or email us on: email@example.com.