Setting up a company to replace an existing charity

Trustees should regularly carry out risk assessments. In so doing they may decide that changing to a company structure is a sensible way of addressing risks. However, they should first;

• consider whether passing the assets to a new charitable company is a possibility; and if so
• weigh up the advantages and the disadvantages.

Before setting up the new company the trustees should read the guidance provided under the following FAQ’s.

What are the advantages of a company structure?

When might it be difficult or not possible to transfer assets to a charitable company? 

What are the disadvantages of replacing an existing charity with one that has a company structure?

What are the advantages of a company structure?

If a charity has been set up as a trust or an unincorporated association it does not have a separate legal identity. Two important considerations arise from this.

1. The charity cannot enter into contracts in its own name. Instead the individual trustees will need to do this. This means that they will be responsible for meeting the terms and the liabilities of the contract. This may give rise to personal liability for losses where the charity has no funds to reimburse its trustees.
2. The charity cannot hold title to land in its own name. If the trustees hold title to property then, whenever there is a change of trustee, deeds of appointment and transfer, and notification to the Land Registry will be required.  A company can hold title to property in its own name. However, if title to property is the main, or only driver for setting up the company, then an alternative for individual trustees is to make use of The Official Custodian for Charities Land Holding Service (CC13).

When might it be difficult or not possible to transfer assets to a charitable company?

The most common difficulties are:

• the charity has permanent endowment (ie land that it must retain for the purposes of the charity or capital that it cannot spend as income): a company will not be able to hold these assets as its own property. This is because company law allows a company to wind up and expend all its assets (It is possible for a company to hold permanent endowment property on trust);
• there is a clause in the  existing governing document that specifies who the assets are to be transferred to, or the charitable purposes that must be pursued, if the trust or unincorporated association ceases to operate;
• the governing document does not provide a power to dissolve the original charity – if the assets are not permanent endowment it may be possible to make a grant to the new charity;
• the existing charity is entitled to income from covenants  or Gift Aid. or is the potential recipient of legacy income: the new company may not automatically be entitled to receive these.

If any of these could be a problem please contact Charity Commission Direct for advice before setting up the new company.

What are the disadvantages of replacing an existing charity with one that has a company structure?

There may be greater initial and ongoing running expenses. In the short term these may arise from the need to submit annual returns and accounts to both Companies House and to the Charity Commission.

When the relevant part of the Charities Act 2006 comes into force in 2008 there will be a new legal form available  - the Charitable Incorporated Association. A charity set up as a CIO will be regulated solely by the Charity Commission. However, this option will not be available to all charities.

The trustees of the original charity will need to consider whether changing to a company structure could jeopardise:

• the receipt of income from covenants or Gift Aid (discuss this with your professional advisors and Her Majesty’s Revenue and Customs (HMRC); and/or
• future legacies.

With regard to legacy income the law does not currently automatically consider the charitable company to be the successor to the unincorporated charity. Up until now the way of avoiding this problem has been for the unincorporated charity to remain in existence. Following the implementation of provisions in the Charities Act 2006 relating to mergers, registration of the merger of the unincorporated charity and the company may be an option to consider to avoid this difficulty.

If there are any outstanding mortgages the trustees will need to think about how these will be serviced. Borrowings may need to be renegotiated to ensure that the company is the contracting party.

If the title to land is to be transferred to the new company the trustees should take independent legal advice on the terms of any agreement to occupy land. These may be affected by the transfer. A landlord may prefer a leasehold agreement with individual trustees to an arrangement with a limited liability company.

There may be issues in relation to contracts of employment, insurance policies, grants or other contractual obligations. Transferring these to the new company may not be straightforward.

The accounts will need to be prepared in accordance with the requirements for charitable companies.

The above is not an exhaustive list. Trustees should always take appropriate professional advice before making the decision to set up a company.