Conversion to Corporate Status

Why Incorporate?

Many charity trustees have been taking the choice to incorporate their charity to limited company status during these times of increased litigation, Main benefits of incorporation is that a company is a separate legal person that can hold property and enter into contracts in its own name, thus relieving the trustees from this responsibility.

This removes the personal liability of the trustees to perform the contractual obligations of the charity so that, for example, in the case of a charity becoming unable to make ends meet, the trustees will not be personally liable to meet any shortfall to contractors and employees from their own funds. It also makes the company rather than the trustees the target for claims by employees for breach of employment laws and negligence claims by users of charity facilities and others.

Incorporation also avoids the need to transfer ownership of property and other assets when trustees change.

Disadvantages

The main drawback of incorporation is the added administrative burden of abiding with both the Charities Act and the Companies Act. However, this burden is not great as, for example, the same accounts can, with little modification, be used for both filing purposes.

Incorporation does not prohibit charity trustees from their obligations to the charity, such as the duty to act in the best interests of the charity.

Method

In other words, a new company limited by guarantee is formed and registered both at Companies House and with the Charity Commission (assuming that its income is over the relevant threshold). Normally, the objects of the new charity will be identical to the existing charity.

The existing charity may then, presuming it has the appropriate power, pass its assets, employees and contracts to the new charity, subject to assumption of its liabilities.  An asset transfer agreement will often be appropriate to record this. Often the existing charity will be dissolved. The previous policy of keeping the old charity in existence to continue receiving legacies for the existing charity has fallen away since 2007.

Provided the proper details are registered with the Charity Commission, legacies for the existing charity are now automatically transferred to the new charity.

When the Charitable Incorporated Organisation (CIO) comes into existence, this organisation will most likely be used in place of the limited company as it has the rewards of incorporation but without the need for registration at Companies House.