Time to incorporate?

Posted by Tony Chester

Partner

Furley Page acts for many unincorporated charities in Kent and the South East. A number of these charities have indicated to us that they are finding it hard to attract new trustees due to concerns over potential personal liability. For some of these charities, incorporation could be the answer.

Unincorporated charities operate either as trusts or as unincorporated associations. Whilst the majority of charities are unincorporated, using a corporate or company structure can bring significant advantages, including reducing risk to their trustees.

A trust or unincorporated association does not have a separate legal identity and therefore operates through its trustees (or members of the management committee in the case of unincorporated associations). Trustees or members hold property ‘on trust’ for the charity. In addition, they will enter into contracts and loan agreements as individuals. Contracts will include those for the purchase or supply of services, loan agreements, and employment contracts with charity workers. This arrangement does expose trustees to risk of personal liability and, while trustees are entitled to be indemnified by the charity for liabilities properly incurred, trustees will remain liable for debts which cannot be satisfied from the charities funds – a sobering thought in the current economic times.

By way of contrast, for charities who are incorporated, the incorporated charity has a legal identity separate from its trustees or members. The charity can hold property and enter into contracts and agreements on its own behalf, thus substantially reducing the exposure of the trustees to risk, although not of course, removing all risk. It is worth remembering that trustees of incorporated charities are still subject to regulation and can be found liable for negligent and improper actions.

In addition to reduced risk, a second major advantage to incorporation may be that a charitable company will continue in existence regardless of any changes to its trustees or its membership. This means that charitable companies do not have to transfer and re-register property or terminate and re-enter contracts every time a trustee retires, thus removing a major administrative burden for many boards of trustees.

While, of course, incorporated charities are obliged to comply with company regulation in addition to that found under the charities regime, the burden is not generally found to be too cumbersome. It could be argued that company regulation can help to improve a charity’s practice and procedures; Charity Commission surveys suggest that incorporation can bring a more professional approach.

The process

Incorporating an existing charity involves setting up and registering a new charitable company which takes over the existing charity’s operations, assets and liabilities by way of transfer. The old charity may then be dissolved or may continue to exist as a shell depending on the circumstances. The exact procedure will depend on the existing charity’s constitution, assets and operations. There are a number of pitfalls which must be avoided.

Is it for you?

Whether or not incorporation would benefit your charity depends on its size and complexity. The Charity Commission considers that a company structure may be appropriate where the charity is quite large, has employees, delivers services under contractual arrangements, regularly enters into commercial contracts or owns land or other property. Higher risk activities, such as working with vulnerable people, can also be indicative that incorporation may be appropriate.

For further information contact Anthony Chester on 01634 828277


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