What is a CIO?
The CIO is a bespoke incorporated legal form for charities. A charity can choose an unincorporated form (such as a trust or an unincorporated association) or an incorporated form (such as a company limited by guarantee or a CIO). Incorporated charities have their own legal personality – they can enter into legal relationships in their own name – and their trustees have better protection from personal liability for the charity’s debts than the trustees of unincorporated charities.
Before the introduction of the CIO, the most common incorporated legal form for a charity had been the company limited by guarantee. However, charitable companies limited by guarantee must comply with dual regulation from the Charity Commission and Companies House, which some find burdensome. They are also subject to company law, as well as charity law, in relation to their governance arrangements.
CIOs only need to register with the Charity Commission and comply with charity law, which cuts down on red tape for trustees.
What does this mean for me?
This was a very exciting development, but the CIO is not be for everyone.
What are the main pros and cons?
The main advantage of a CIO is the limited liability afforded by an incorporated form, alongside the lower administrative burden associated with being regulated by the Charity Commission alone, and not by Companies House. The CIO is the only bespoke legal vehicle for charities, and has been designed with charities in mind: there is often a feeling that charities can be hamstrung by the constraints of company law – not for profit guarantee companies represent a very small proportion of the companies registered at Companies House. The benefits of having only one regulator, the Charity Commission, means CIOs do not have the additional burden of having to make dual filings with Companies House.
In some instances, the CIO may be more flexible than a charitable company limited by guarantee: a CIO constitution can allow for decisions at meetings to be by consensus, for example. The regime for electronic communications with members is also less rigid than the regime which applies to charitable companies. And smaller CIOs can prepare receipts and payments accounts, while smaller charitable companies must prepare accounts on the accruals basis.
However, CIOs are still relatively new and untested. While charitable companies can take advantage of the backdrop of company law, there is a completely new legal regime for CIOs, and grey areas have already emerged and may continue to do so.
There are also benefits to being a company which may be important for larger charities with more complex financial arrangements. CIO legislation makes no provision for the maintenance of a register of charges, which may make it more difficult for a CIO to borrow as a lender will not be able to obtain the protection of registering a charge at Companies House.
There are also some significant differences between a CIO and a company in terms of governance. For example, company law confers certain absolute rights on its members, in a way that the CIO regime does not. Company members have automatic rights to receive accounts, call meetings, vote by proxy, demand a poll and remove a trustee: a member of a CIO will have none of those rights unless the constitution expressly provides them. Similarly, whilst a company can change its constitution with a written members’ resolution of 75%, a written resolution for a CIO must be unanimous.
Anyone establishing a new charity should certainly consider whether a CIO might be an appropriate vehicle. Smaller charities are likely to find the protection afforded by a limited liability entity, coupled with the lower administrative burden, a real advantage. New charities which plan to hold significant assets, or borrow funds, may still prefer to set up as a charitable company. The Cabinet Office originally assumed that the target market for CIOs would be charities with incomes of between £10,000 and £500,000.
Existing unincorporated charities which are seeking to incorporate may also wish to consider the CIO as an option. Again, limited liability, without the need to file paperwork with Companies House, may be attractive to smaller charities.
Existing companies limited by guarantee already have the advantage of limited liability. The main advantage of converting to a CIO is the less burdensome regulatory and administrative regime.
On 1 January 2018, legislation came into force that allows for charitable companies to convert to a CIO using a new process, which makes conversion much easier. This statutory process enables the existing charity to continue, but in a different legal form. This means that the existing name and charity number can be kept, as well as (in most cases) the existing bank accounts. The conversion process itself includes preparation of a new CIO constitution, the passing of two members’ resolutions, as well as the submission of an application to the Charity Commission. If the conversion is approved, the Charity Commission arranges for the removal of the existing charity from the register of companies and registration of the new CIO with the Commission.
BWB can advise further on the suitability of the legal form of a CIO for your own charity and on the steps which are needed to set up a CIO.
If you are an existing charity, BWB can advise further on the potential advantages of a CIO and on the new regime for converting charitable companies limited by guarantee to a CIO.
This information is necessarily of a general nature and doesn’t constitute legal advice. This is not a substitute for formal legal advice, given in the context of full information under an engagement with Bates Wells.
All content on this page is correct as of March 3, 2017.