The landscape of the charitable sector has changed significantly in recent years. Individuals seeking to promote their philanthropic wishes in the UK are now faced with a number of decisions when considering how best to accomplish specific charitable objectives (known as objects). Set out below is a brief summary of the three ways in which a charity can currently be established under the law of England and Wales.
The simplest form a charity can take is a charitable trust. Historically charitable trusts were widely used and arise from a combination of UK trust and charity law. Typically an individual leaves funds to be held on charitable trusts (often upon their death via their will). The trustees then either distribute those funds in the short term or, if the intention was longer term, the funds are invested to generate income and capital growth. The trustees seek to fulfil the objects of the charity via direct action or donations/grants to charities with similar objects and other organisations. Generally charitable trusts are used when a charity is envisaged to have simple affairs and lower levels of financial assets. Significantly, depending on the circumstances, the trustees may well retain personal liability for the actions of the charity.
Prior to 2013, the alternative to establishing a charitable trust was to set up a charitable company. Essentially the charity would be incorporated as a company limited by guarantee (as such it would not strictly have shareholders). The charity would be both a charitable entity and register as a company with Companies House. The articles of association of the company would form the governing document of the charity and those rules would govern its administration. The charitable company would have directors (in effect the charity’s trustees) who dealt with day-to-day decisions and members who decide and vote on the more significant governance decisions/issues. Generally we find that such entities are more suited to trustees who wish to actively engage beneficiaries of the charity directly, intend to fundraise amongst the general public and/or if substantial assets are involved. Whilst there is a greater administrative burden, the use of a company provides certain safeguards to the trustees/members including ensuring the trustees’ personal liability is limited to a minimal amount.
The third option is a charitable incorporated organisation (CIO). CIOs were introduced in 2013 and provide a “halfway house” between the simpler charitable trust and the more complex charitable company. A CIO combines the flexibility of a charitable trust with the governance structure and level of safeguards enjoyed by a charitable company. However as bespoke entities (neither a trust nor a company) each retains a very specific governance and decision making system that must be carefully adhered to by the trustees. CIOs do limit the personal liability of trustees and are often used where small or medium sized charities are considering taking on employees and/or entering into contracts with third parties. CIOs are required to register with the Charity Commission upon incorporation and this can often take some months to complete due to the current backlog being experienced by the regulator. Both charitable trusts and charitable companies only need to register with the Commission once they have received over £5,000 of income (inclusive of donations).
The decision on what type of charitable vehicle to use is fundamental to the future work of each charity. Invariably the decision will need to be made on a case-by-case basis taking into account the unique objectives and requirements of each charity.
For further information, please contact:
Neal Todd, Partner, Fladgate LLP (email@example.com)
Matthew Bennett, Partner, Fladgate LLP (firstname.lastname@example.org)
Helena Luckhurst, Partner, Fladgate LLP (email@example.com)