Hello and welcome to this recording from Support Cambridgeshire, a partnership of Cambridge CVS and Hunts Forum. This module is one of several short recordings we have developed to help people set up their own community groups. This part considers which governing structure you might select for your group. Alongside these recordings, you will find guidance links in this transcript.
These are the main legal structures for charities
- Type 1 An unregistered charity or association or a registered charity
- Type 2 A charitable Incorporated Organisation also known as a CIO
- Type 3 A company limited by guarantee
- Type 4 A trust
- Type 5 A community benefit society
Do you need to be incorporated?
What your charity wants to do is likely to dictate the structure, but it also links to how much risk your trustees are willing to take – which comes down to whether you need to be incorporated.
Incorporated groups have a legal standing similar to a person, which means the group can make legal commitments, such as entering into contracts, rather than the trustees as individuals having to make this commitment. This means trustees of incorporated groups are not personally liable for the group’s actions. An incorporated structure is most appropriate for groups which intend to trade, raise large sums and or enter into legally binding contracts such as employing staff and managing property.
Conversely, unincorporated groups cannot enter into contracts in their own right and a trustee must enter the contract in their own name – for example setting up an insurance policy for the group. An unincorporated structure is most appropriate for groups with low incomes and without employees or property.
Income below £5,000pa
- If you are likely to start up with an annual income of below £5000 pa – the two most popular structures are to set up as an unregistered charity (also known as a charitable association) or as Charitable Incorporated Organisation.
- Unlike a registered charity, an unregistered charity is, as the name suggests, not registered with the Charity Commission because its income is below £5000 pa. But both registered and unregistered charities will be run by a group of trustees, are unincorporated so trustees are personally responsible for any of the charity’s financial and legal obligations and are required to comply with Charity Commission rules. However, unregistered charities do not send in a report of their activities or accounts to the Charity Commission.
- To set up an unregistered charity all you need to do is to find at least one other person willing to be a trustee and complete and sign a constitution we would recommend using the charity commission template and the link is in the transcript associated with this recording. You don’t need to register your group anywhere you can just get started. If the group’s income reaches £5000 per year it will then need to register with the Charity Commission – if this looks like it might happen to your group get in touch as we can help with this.
- The second option is to set up as a Charitable Incorporated Organisation (CIO) which as the name suggests is incorporated – so it exists as a separate legal entity. You can set up from the beginning as a CIO as there is no minimum income requirement. There are two types of CIO: an Association model which has voting members and trustees, and a Foundation model which does not have voting members and is run by appointed trustees. CIOs are registered with the Charity Commission and must provide accounts and annual returns. To set up a CIO is more complex than an unregistered charity and we would recommend speaking to us for guidance.
Income above £5,000 pa
- If you have an annual income of above £5000 – the two most popular options for governance structure are to become a registered charity or a CIO.
- To apply to become either a registered charity or a CIO you have to meet various legal requirements to prove you are a charity in the eyes of the law and once you are registered you have to comply with Charity Commission rules, which includes sending in reports and accounts – the level of reporting depends on the income.
- However, as you may recall a registered charity is not incorporated so the option most groups will go with is to set up as a Charitable Incorporated Organisation (CIO) which we discussed on the previous slide.
There are other structures you can use to set up a charity, but they are less frequently used:
- A charitable company is a limited company registered with companies house that has charitable aims – charitable companies are set up using a Memorandum and Articles of Association rather than a constitution However once income reaches £5000 per annum the company must also register with the Charity Commission and will then need to report to both regulators annually.
- If you are setting up a committee to manage a particular asset or legacy you might set up as a Charitable Trust
- Where communities are managing community assets such as a community shop or community owned pub they may choose to become a Community Benefit Society which is owned and run by its members for the benefit of the wider community. If these societies meet charitable criteria, they can call themselves charities. They are registered with the Financial Conduct Authority and not the Charity Commission. They are incorporated and can have paid directors.
This chart summarises which charity structure is incorporated. This means the name and therefore the liability on any contracts is the charity’s and not the trustees. The chart also highlights who the legal regulator is for each legal structure i.e. the organisation that sets the rules and who the charity has to report to.
How will you be funded?
Another consideration in your choice of structure, is how you expect to fund your activities. If you anticipate your funding coming from small donations or grants then your trustees may feel that their level of liability is acceptable and they are happy to work within an unincorporated structure. But once your organisation starts entering into contracts with grant funders or commissioners for larger amounts or engages in the sale of good or services in a more major way the financial risks increase, and trustees are more likely to want an incorporated structure to limit their liability. Some charities are run as social enterprises which means that rather than seeking donations and grants they obtain most of their funding by offering goods or services to consumers or commissioners.
A Social enterprise is not a legal structure in its own right, it describes a business that is driven by social objectives rather than profit. A charity can be set up to act as a social enterprise but it is limited by charity law so for example if your charity is set up to advance education you can only sell services connected to education. Social enterprises can also be set up as social businesses, these do not have to follow Charity law. One form a social business might take is as a Community Interest Company (CIC) these straddle the boundary between charity and business ploughing significant parts of any profit back to support social aims but still being able to offer dividends to private investors . There are links on this topic below.
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