Whether you are looking to establish a charity or are finding that the current operational structure is no longer serving your charity’s needs, it is important to understand the different structures available.
Each structure carries with it a series of pros and cons that must be understood if you are to find the structure that best suits your charity.
The following summary relates to charities established in England and Wales.
Unincorporated Associations (UA) are the structure that is most commonly, but not exclusively, used by small local groups that tend to have limited resources and are hoping to achieve small community-based goals.
UAs tend to be quick and inexpensive to establish and operate.
The governing document is relatively simple and straightforward, allowing for a degree of flexibility when operating.
The main benefit of a UA is that it does not carry with it excessive administrative burdens.
If you know that your charity never plans to employ staff or own property, then a UA can be an effective structure to allow you to focus immediately on delivering charitable activities.
The simplicity of a UA is part of its drawback. The absence of a separate legal identity can make it more difficult to scale operations or manage risk as activities expand.
In addition, some funders may prefer incorporated structures due to the limited liability they provide to trustees.
Similarly, if you do move onto more ambitious projects, the charity cannot hold property or enter into contracts in its own name; these must be held or entered into by trustees on its behalf.
This personal liability also extends to all of the organisation’s debts and obligations, meaning that careful financial planning is imperative to protect your own assets.
Charitable trusts are controlled by a small group of trustees and are commonly used either to hold and manage assets for charitable purposes or to make grants.
Once a trust deed is created, the charitable trust can be formed relatively easily.
Trusts have no need for wider membership and can enable a small group of trustees to manage assets and activities without a broader governance structure.
If there are specific assets or funds that are to be used for charitable purposes, a trust is a reliable way of managing them.
As with UAs, trustees are not shielded by the charity and remain personally liable for any debts that are accrued.
As a trust does not have separate legal personality, contracts and property are held by the trustees in their capacity as trustees.
Trust deeds can prove challenging to alter, so changing the charity’s constitution may be difficult if you do desire a change of direction in the future.
If you would like your charity to be a separate legal entity from the trustees, then using the charitable company structure might be a good choice.
As a separate legal entity, the charity provides limited liability protection for trustees provided they act within their legal duties, meaning the charity is responsible for managing its own debts.
This also extends to the ability to enter into contracts and own property in its own name rather than under the name of a trustee.
Some funders may prefer incorporated charities due to the additional governance and regulatory framework.
Being a company means that your charity has to comply with the requirements of Companies House as well as the Charity Commission.
This can sometimes mean administrative requirements may increase, particularly as Companies House continues to implement compliance reforms.
It will be necessary to file annual accounts with both bodies and to keep pace with any reporting or accounting requirements they impose.
It is generally more complex to establish and will need greater consideration if the mission of the charity changes at any point.
Designed specifically for charities, a Charitable Incorporated Organisation (CIO) is a formal structure that avoids the burdens of dual regulation.
As with a charitable company, a CIO provides limited liability protection for trustees, provided they act within their legal duties.
Similarly, it can enter into contracts and own property in its own name.
There is no need to register a CIO with Companies House, so you will only need to stay compliant with the requirements issued by the Charity Commission.
A CIO can be adapted for wider membership with an association model or stick with just trustees through the foundation model.
A CIO must be registered with the Charity Commission before it can begin operating, regardless of its anticipated income level.
If your charity is particularly large or complex and engages in substantial commercial activities, a CIO may present practical challenges in certain circumstances, such as when borrowing secured finance.
As there is currently no public register of charges for CIOs, it can make secured lending more complex.
The question of which structure to choose largely on a number of factors such as planned activities, funding sources, preferred governance structure etc.
This overview is intended as general guidance only and does not constitute legal advice. The appropriate structure will depend on your charity’s specific circumstances and professional advice should be sought before making a decision.
Our experienced charity and not for profit team are happy to help organisations and trustees with a wide range of issues, including assessing the most appropriate structure for your charity.
Please get in touch with our Partner Hazra Patel (hazrapatel@lubbockfine.co.uk) if you want to discuss any of the matters covered in this article.
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