Stewardship Briefing Note 2017/3

Transcription

1 Stewardship Briefing Note 2017/3 Trust, Company or CIO? A Guide to the Distinctions Stewardship, 1 Lamb s Passage, London EC1Y 8AB t: e: enquiries@stewardship.org.uk w: stewardship.org.uk

2 CONTACT DETAILS Stewardship 1 Lamb s Passage, London EC1Y 8AB t: e: enquiries@stewardship.org.uk w: Stewardship is the operating name of Stewardship Services (UKET) Limited, a registered charity no , and a company limited by guarantee no , registered in England Copyright Stewardship 2017 COPYRIGHT This publication is the copyright of Stewardship. We want our resources to have the maximum impact, therefore you are welcome to reproduce or otherwise distribute this material in whole or part. We simply ask two things: (1) there must be no use for commercial gain, and (2) Stewardship is clearly acknowledged with the following wording Reproduced with permission from Stewardship. If extracts are to be used in another context, permission should be sought in advance by ing enquiries@stewardship.org.uk or telephoning Thank you. DISCLAIMER Whilst every care has been taken in the preparation of this material, Stewardship cannot be responsible for action taken or refrained from in reliance thereon. It is recommended that appropriate professional advice be sought in each relevant individual circumstance. 2

3 table of contents Page 1 Introduction 4 2 The liability issue 5 3 Holding legal title to property 5 4 Formalities, filing requirements, penalties 6 5 Accounting requirements 6 6 Conversion 7 7 Set up costs 7 8 The feel 7 9 Contact us 7 Appendix 1: Summary of main differences 8 3

4 1 Introduction 1.1 If you are intending to set up a new charity for a church or other Christian ministry, you have a choice between three main structures. These are: (i) The charitable trust (with a Declaration of Trust or Trust Deed as the constituting document); or (ii) A charitable company limited by guarantee (governed by Memorandum and Articles of Association); or (iii) A Charitable Incorporated Organisation ( CIO ) a more recent form of legal entity designed specifically for charities. 1.2 The first point to make is that all are equally charities. A charitable company is no less a charity than a charitable trust or CIO, they simply have different legal structures. All structures can provide the full range of charitable objects and powers that you may need and are essentially eligible for the same tax reliefs. With all the structures, the trustees remain subject to general charity law and must always act with appropriate care and must keep within the charitable objects and powers. However, trustees (directors) of a charitable company are also subject to the Companies Acts and various company law requirements. 1.3 As a general point, a Trust is simpler to administer and cheaper to establish and operate. The chief attraction of the company structure was that it provided protection for the individual trustees/directors from personal financial liability in some circumstances where trustees of an unincorporated charitable trust would not be protected. 1.4 There has more recently been an important change with the CIO alternative, introduced in early This permits charities and their trustees to gain the benefits of limited liability outside the usual Company Law/Companies House framework. They are created by making an application to the Charity Commission. 1.5 The question arises, therefore, as to why any charity should choose to be a company rather than a CIO. In the long run, we do expect that the CIO is likely to become the first choice of format for most small/medium sized charities. However, some commentators have expressed concern that, because they are relatively new, CIOs may find difficulty with some suppliers of services and some financial institutions. 1.6 In particular, CIOs may find difficulty with the willingness of banks to provide secured loans (such as mortgages). There are legal differences for lenders in how mortgages and other charges are registered as between charitable companies limited by guarantee, and CIO s. Readers should be aware that, as a result, some commercial lenders are less enthusiastic about (and may decline to provide) mortgage finance to CIO s in circumstances where they would lend to a charitable company or trust. Stewardship on the other hand is happy to lend to CIOs. There may also be some additional delays in the registration process with the Charity Commission. Therefore, if getting up and running quickly is very important for you, it may be better to start as one of 4

5 the more traditional forms (trust or company). Also for very small charities there is a need under the CIO structure to provide accounts and reports to the Commission where other forms do not. 2 The liability issue 2.1 There are two sets of potential liabilities that charity trustees face. 1. The first is in respect of the duties owed to the charity to act with the necessary care and not to act outside the objects and powers of the charity. If trustees cause a loss to the charity, either through a lack of proper care or by spending money for purposes outside the charity s objects, they can be called upon to refund the charity out of their own resources. This applies as much to directors of a charitable limited company and CIO as to the trustees of an unincorporated charity. 2. The second set of liabilities has to do with potential claims by third parties. Examples of these would be: claim for damages for personal injuries; claim for compensation for unfair dismissal by an employee; claim for breach of contract by a supplier of goods and services (e.g. building contractor on building project); claim for damages in respect of wrong counselling advice. It is in respect of these potential claims that protection is afforded to trustees of a CIO or charitable company. 2.2 In the case of a CIO or company, a separate legal entity exists. This means that any debts owed by the charity are indeed owed by the charity and not by the trustees personally. This assumes that the trustees have not given personal guarantees or entered into contracts in a personal capacity. In the case of a Trust, there is no separate corporate entity and, therefore, the debts and potential liabilities of the charity, which cannot be met out of its own resources, can become the liability of the trustees personally. 2.3 It should be added that in the case of a company, if the directors/trustees continue to trade/operate whilst knowing that the company is insolvent, they can then become personally liable for debts owed by the company. The implications for trustees of a CIO are essentially the same as for a company. 3 Holding legal title to property As a company or CIO exists as a separate legal person, title to buildings, stocks and shares, etc., can be held in the name of the company/cio and not in the names of the trustees. This saves legal costs and fees associated with a change of legal title of land/buildings when Trustees change. 5

6 4 Formalities, filing requirements, penalties 4.1 The charitable trust structure has the benefit of greater simplicity. Trust Deeds usually leave the trustees to decide how often they meet and how they convene their meetings, etc. They ought to keep minutes of their meetings, although this is not a formal legal requirement. 4.2 CIOs retain most of the simplicity of a trust, being registered only with the Charity Commission and not Companies House. They do have some extra obligations, but none that will affect the routine operation of most small and medium sized churches and charities. The most likely is that they need to provide their accounts and Trustees annual report to the Charity Commission irrespective of their size whereas other charities only need to do this if their annual total income is over 25, Companies face stricter requirements under the Companies Acts. Annual returns and notices of changes of directors or secretary or registered office have to be notified to Companies House within certain time limits. Year end Accounts must be sent to Companies House within stricter time limits. Late filing of the annual accounts brings an immediate fine of 150 which rises if the delay continues. 5 Accounting requirements 5.1 Larger charities For larger charities with an annual total income over 250,000; the requirements are broadly similar for larger charitable trusts, CIOs and charitable companies in that the Charities Accounting Regulations have placed equally onerous requirements to keep accounting records and to produce annual accounts to certain standards on non-company charities as apply to companies. 5.2 Smaller charities For smaller charities; trusts and CIO s will be able to make use of the simpler receipts and payments basis of accounts if they wish to. Charitable companies will still need to prepare accounts that comply with the Companies Acts and full charity accounting regulations and therefore usually need technical accountancy advice and help even when small. 5.3 Details of size thresholds Company, CIO and trust are required to have their accounts examined (like a mini-audit) when the income or expenditure exceed 25,000 per annum. Company, CIO and trust require full audit when the income exceeds 1,000,000 in England and Wales or 500,000 in Scotland and Northern Ireland or gross assets exceed 3.26 million and gross income exceeds 250,000. 6

7 A trust and CIO (but not a company), where income is below 250,000 per annum, is able to prepare a simple form of year end accounts called receipts and payments accounts. 6 Conversion Charitable trusts are able to transfer their operations, assets and liabilities to a new CIO. Charitable companies are expected to be able to convert their status from company to CIO from Indications are that, with a company conversion to CIO (because the legal entity remains the same but only the legal status changes) this will be a simpler process than transferring the operations into a new charity. 7 Set-up costs If you use our services, the cost of setting up the company or CIO is about 25% higher than those of the Trust because of the greater potential complexities. However, there are a number of advantages of the CIO or charitable company structure, as highlighted in this note. 8 The feel Particularly for churches, the idea of being formed as a company could cause some cultural problems. Legally there are no problems, but it may have an unusual feel. Companies are, however, increasingly common and accepted as normal. Please note that charitable companies do not need to have the word limited at the end of their name. 9 Contact us For further help or information, please contact us on or enquiries@stewardship.org.uk. You can also visit our website at stewardship.org.uk. 1 This is an anticipated date, but remains unconfirmed at the time of writing. 7

8 Appendix 1: Summary of main differences Aspect CIO Company Trust Personal liabilities Trustees/directors are protected from personal liability to third parties (unless entered into contracts, etc., in a personal capacity). Could still be liable for breach of trust. Trustees/directors are protected from personal liability to third parties (unless entered into contracts, etc., in a personal capacity). Could still be liable for breach of trust. Trustees have potential liability to third parties, and could be liable for breach of trust. Holding legal title to property In name of charity so unaffected by changes of trustees - avoids costs. In name of charity so unaffected by changes of trustees - avoids costs. In names of trustees - cost of transferring title each time trustees change. Formalities Simpler to operate. Various Companies Acts requirements more onerous. Simpler to operate. Accounting requirements Slightly less onerous. When income exceeds 250,000 pa, the requirements are virtually equivalent. Slightly more onerous and complicated, especially at income below 250,000 pa. Slightly less onerous. When income exceeds 250,000 pa, the requirements are virtually equivalent. Set-up costs More expensive. More expensive. Cheaper. Charity Commission registration Required for all CIOs, whatever the income. Only available/required if income exceeds 5,000 pa. Only available/required if income exceeds 5,000 pa. 8