Should you register your school as a Charitable Incorporated Organisation?
They made us wait six years, but finally, at the end of 2012, the Charity Commission began the implementation of what could be viewed as one of the most innovative reforms of the Charities Act 2006, and started accepting registrations for Charitable Incorporated Organisations (CIOs) – a new type of corporate entity created specifically for charities.
For school trustees, directors and governors, this will open up your options in deciding on the best charitable structure for your educational establishment. The main legal forms that an educational charity may now adopt are as follows:
1. Unincorporated Charities
You could decide to run your school as an unincorporated charity. This would either be as a trust or as an unincorporated association. However, neither option offers any protection from personal liability for trustees.
2. Incorporated Charities
This has typically taken the form of a company limited by guarantee. An educational charity set up in this way will have its own legal personality – it can enter into legal relationships in its own name – and trustees will have protection from personal liability for any debts the school runs up.
However, a charitable company limited by guarantee must comply with dual regulation from the Charity Commission and Companies House, and falls under both charity and company law in terms of governance arrangements.
It is in this battle against red tape where the CIO steps in.
The CIO: Benefits and Disadvantages
Benefit 1: Limited Liability & Independent Legal Personality
The CIO offers the same benefits of incorporation. Trustees and members will remain easier to recruit and retain, being safeguarded from the financial liabilities of the CIO. The school’s independent legal personality will make it easier to hold property and enter contracts.
Benefit 2: Less Regulation & Red Tape
The CIO, which has been designed solely for charities, also offers a more streamlined legal framework regulated only under charity law. Trustees will only need to register with – and report to – the Charity Commission, which will reduce regulation and costs.
Benefit 3: Added Flexibility
A CIO could, in some cases, offer greater flexibility than a charitable company limited by guarantee. For example, there is a less rigid email communication regime; simplified accounting (smaller schools could prepare receipts and payments accounts, as opposed to the accruals basis); and the CIO constitution allows for decisions by consensus at trustee meetings.
Disadvantage 1: Leap into the Unknown?
Being new and untested, school trustees may wish to adopt a ‘wait and see’ approach. It may be wise to see how the CIO regime beds down, and to gauge the uptake and reaction among other educational charities.
Disadvantage 2: Best for smaller schools?
CIOs may be less useful for larger establishments, which may prefer to remain companies. In particular, there are no plans to maintain a searchable register of charges over CIO assets (like Companies House provides for companies). This is likely to discourage some lenders, so if you are planning to raise funds for your school by entering into secured borrowing arrangements or by issuing debentures, this may not be the best structure for your educational charity.
CIOs: The Timeline for Implementation
Existing charitable companies will most likely have to wait until 2014 until being able to convert to a CIO. Although the Charities Act contains provisions which enable conversions, the regulations completing the legal framework for this are still being finalised.
From 1st July 2013, any unincorporated charity with an income over £25,000 will be able to register as a CIO. This will extend to unincorporated charities with income over £5,000 in October, and to all unincorporated charities from 1st January 2014.
So what’s it to be?
The Cabinet Office’s target market for CIOs appears to be charities with incomes of between £10,000 and £500,000. Any school that fits within this band will find the protection of limited liability, the commercial flexibility and lower administrative burden of a CIO particularly useful. If your organisation holds (or plans to hold) significant assets, or plans to borrow funds, a company structure may be better suited still.
It is certain that CIOs are worth considering as a charitable form, and it would be a good idea to seek legal advice on deciding what the best structure may be for for your educational charity.
This briefing is for guidance purposes only. RadcliffesLeBrasseur LLP accepts no responsibility or liability whatsoever for any action taken or not taken in relation to this note and recommends that appropriate legal advice be taken having regard to a client's own particular circumstances.