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4 types of legal structure for a charity

When setting up a charity, there are a number of options available for the legal structure that the organisation can take. It is essential that the charity chooses carefully, as any change of organisational structure further down the line will result in the charity needing to submit a fresh application to the Charity Commission for formal registration as a charity. The most suitable will often be based upon the intended activities of the charity and the resources available to them. Let’s take a closer look at the pros and cons of four types of legal structure for charities:

1) Charitable company limited by guarantee

This structure is probably one of the most common. It is a limited liability company, which is incorporated and registered at Companies House. The activities of the charity are governed by the articles of association, which are registered at Companies House. It has its own legal personality and is therefore able to enter into contracts with other organisations and hold property in its own name. This structure is well recognised and being limited liability in nature provides a certain level of protection for the members and trustees of the charity. One of the downsides to this structure is the formality and expense that comes with a limited company. The charity would need to submit filings in duplicate to Companies House and the Charity Commission. The trustees also have additional duties placed on them as they would not only need to comply with their trustee duties but also their directors duties under the Companies Act 2006.

2) Trust

A trust can be relatively simple and inexpensive to set up compared to the other types of charitable organisations. It is governed by a trust deed, the contents of which are more flexible as there is no statutory framework. The trust is not a legal entity in its own right which means that the trust cannot enter into any agreements in its own name and the trustees will need to enter into such agreements in their personal capacity. This leaves the trustees open to a swath of personal liability. A structure of this nature would not be ideal where the charity intends to employ people.

3) Charitable unincorporated association

An unincorporated association is another straightforward and inexpensive structure for a charity. The charity will be governed by a constitution which is not prescribed, though will need to include certain features such as a prohibition on the distribution of funds to members. Like a trust, this structure carries no limitation of liability and is not a legal entity in its own right, therefore the members of the management or executive committee would enter into any agreements on behalf of the charity and may be personally liable.

4) Charitable Incorporated Organisation (CIO)

A CIO is the newest of the legal forms for a charity and is specifically designed for charities. It is incorporated and regulated solely by the Charity Commission which avoids the need for duplicate filings, as is the case for a limited company. It is governed by a constitution, the form of which is prescribed by the Charity Commission and is not as flexible as a trust or unincorporated association. A CIO benefits from the fact that its members have limited liability and it has its own legal personality providing the trustees with a certain level of protection. A downside to this structure is that it is new and relatively untried, which could pose potential problems when the charity seeks finance from financial institutions which may be unfamiliar with this structure.

Need more help?

We can help you to determine which type of structure would best suit your organisation and also assist with the registration of your organisation as a charity with the Charity Commission. With our specialist experience in this area, we can help your organisation avoid the common pitfalls of the Charity Commission application process.

 

Corporate Law

 

 

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