Charity Incorporation

Transcription

1 Charity Incorporation How to 'incorporate' an unincorporated charity and apply for registration Please return this application to the address below: Charity Commission Direct PO Box 1227 Liverpool L69 3UG Note: This pack has been introduced to make it easier for a charity that wishes to incorporate to subsequently register the new company with the Charity Commission. We welcome any comments you have on how this pack can be improved. RTN-1302

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3 Charity Incorporation How to 'incorporate' an unincorporated charity and apply for registration Contents Page Guidance for using this pack 2 Meaning of terms and expressions used in this pack 2 Why do unincorporated charities wish to become companies 3 What are the main advantages to incorporation 3 Are there any disadvantages 4 Other factors to consider 4 How to proceed with an incorporation 5 Common problems 7 What happens after we have received your application 8 Where to send your application 8 Frequently asked questions 9 Completing the application form 9 Winding up the unincorporated charity 9 Notes on completing the application form 10 Preliminary Checklist 11 This publication is covered by Crown copyright September All Crown copyrights are reserved. The following is a concession: Individuals are authorised to photocopy this publication for internal use only. You may not sell or publish this material in any format without our authority. 1

4 Guidance for using this pack 1. This pack is for charity trustees of an unincorporated charity wishing to establish a company to take over its current operations. This is often referred to as incorporation. In practical terms, in most cases the charity trustees ultimate goal is simply to replace the existing unincorporated charity with an incorporated version. Effectively the charity trustees are establishing an entirely separate, brand new, charity which is usually compulsorily registerable. They (and the members of the charity) would then be making a decision to transfer assets of the unincorporated charity to the new charity. Throughout this pack we will refer to the original charity, by which we mean the existing unincorporated registered charity; and the new charity by which we mean the newly formed charitable company. Please note that charitable companies should normally be limited by guarantee. If you are proposing to use a company limited by shares DO NOT use this pack, but contact our Registration Division in Taunton for further advice. 2. We have introduced this pack to help charity trustees through the often complex process of winding up the original charity, transferring its assets and registering the new company. If you use this pack you will NOT need to complete a standard registration application form (APP1). 3. We hope that you will find the pack easy to follow but should you need to ask any questions please telephone Charity Commission Direct on Please note that this pack does not offer advice on: the legal process of establishing a company. Information on this is available from Companies House, or from the charity s legal advisers; whether incorporation is appropriate to your particular charity. That is entirely a matter for the charity trustees to determine having taken any necessary and appropriate professional advice (this is particularly important where the original charity has permanent endowment); accounting for assets following incorporation. General advice on this subject is available on our website and can be reached at the transfer of liabilities and legal obligations of the existing charity, including contracts with employees, the terms under which it occupies property, and the conditions of any grants received. Independent legal and/or accountancy advice should be taken on these matters. Meaning of terms and expressions used in this pack 5. In this publication: Governing document means any document setting out the charity s purposes and how it is to be administered. For example it may be a Trust Deed or a Constitution. Charity Trustees are the people who, under the charity s governing document, are responsible for the general control and management of the administration of the charity. In the charity s governing document they may 2

5 be called trustees, managing trustees, committee members, governors or directors. Sometimes a charity also has a custodian trustee whose functions under the provisions of the governing document are restricted to holding the charity s property. Custodian trustees have no power to make management decisions and must act on the lawful instructions of the charity trustees. A Scheme is a legal document by which the Commission may amend, replace or amplify a charity s Governing Document. Must or need to are used to refer to actions that charity trustees, or their agents or employees, are required to take by law, or under the charity s governing document. Where we use terms such as the charity trustees should or use suggest, recommend or advise we are referring to actions which the charity trustees, their agents or employees, could take and which we consider to be good practice, but which are not legal requirements. Why do unincorporated charities wish to become companies? 6. Many charities are established as trusts or unincorporated associations. This means that they usually have a Constitution, Scheme or Trust Deed as their Governing Document. A trust or unincorporated association does not have a separate legal identity and as such cannot enter into contracts in its own name. For example, if an unincorporated charity wished to enter into a contract to supply services to a Local Authority it would be the individual charity trustees who would be named in the contract, and those persons would be responsible for meeting its terms and liabilities. In the case of Conveyances or leases of property, each time a trustee leaves office they would also need to be replaced as a trustee of the property. That can be costly, especially if Deeds of Appointment and Transfer are required, and notification to the Land Registry may also be required. 7. Many charity trustees are concerned about personal liability for losses to the charity s assets. Where a charity is a company, it is the company that is principally responsible for liabilities, not the individual charity trustees. However, if charity trustees have caused loss to the charity by misconduct or mismanagement, they may still be liable. 8. Charities are increasingly recognising the need to identify the risks they face in delivering services in accordance with their stated objects. In many cases incorporation offers a sensible way of addressing identified risks. However, it will not be right for every charity and charity trustees should take independent professional advice before reaching a decision. What are the main advantages to incorporation? 9. The main advantages are: a company is recognised as a legal person, separate and distinct from its members, and as such may hold property in its corporate name, ie not in the names of its individual directors/charity trustees (but see paragraph 26 below); avoiding the expenses involved in the formal appointment of, and transfer of property to, charity trustees; 3

6 the company can enter into contracts and be principally liable for losses arising from any contracts entered into; and the liability of the members of this company will normally be limited on winding up. Are there any disadvantages? 10. Yes. The most common are listed below and charity trustees will need to consider whether the potential disadvantages outweigh the perceived benefits. This list is by no means exhaustive and the charity trustees should seek advice from their own professional advisers regarding establishing a company and whether this is the best way to minimise any possible risks. The likelihood of greater initial and ongoing running expenses (as compared with an unincorporated body). For example, legal, registration and other fees on setting up, and the recurring expenses of submitting annual returns and accounts to both the Registrar of Companies and the Commission. The need to comply with the requirements of the Companies Acts in relation to such matters as submission of annual returns, the passing of resolutions, the keeping of minutes of meetings, the qualifications of directors and liquidation. Whilst, as mentioned above, the liability of the members is limited, the governing body of the company will effectively be the charity trustees within the meaning of Section 97 of the Charities Act 1993, and would therefore still be personally liable for any loss arising from a misapplication of funds. In other words the directors are acting as the charity trustees. Other factors to consider 11. The trustees of the original charity will need to consider whether incorporation would put at risk any income due to the charity through Deeds of Covenant, Gift Aid or any future legacies. If the original charity receives income from deeds of covenant, the trustees should discuss this with their professional advisers and the Inland Revenue, to find out whether they can be assigned to the new charity. 12. In most cases it will be the intention of the charity trustees to wind-up the original charity and have it removed from the Register. However, if the original charity is likely to receive legacies it is important to recognise that the law would not automatically consider the charitable company as the successor to the dissolved unincorporated charity. The risk of "losing" such legacies can be reduced if the memorandum of the company makes it clear that it is the successor body to the original charity and if the objects are sufficiently similar (or identical) to those of the original charity. In our view legacies to a dissolved charity take effect for the purposes of the dissolved charity and it would be appropriate for that legacy to be passed to the successor body of the original charity. If the charity trustees of the original charity think that it may be a beneficiary of future legacies they should discuss the matter with their professional advisers. 4

7 13. If for some particular reason the original charity is going to continue in existence, having transferred only part of its assets to the new charity, it will still need to meet the minimum requirements for registration if it is to remain on the Register of Charities. It will need to have either: an income of at least 1000 a year; the rateable use or occupation of land; or permanent endowment. Charities which do not meet these requirements will be removed from the Register (this does not affect their status as charities under the law) and accordingly will not be required to submit annual returns and accounts to us. 14. The charity trustees would also need to consider if there are any outstanding mortgages on property or land and how these are going to be serviced after incorporation. Any borrowing on behalf of the original charity would have been entered into by the charity trustees in their personal capacity. Following incorporation, any borrowings will need to be reconsidered, and possibly renegotiated, to ensure that the company is the contracting party. 15. If it is intended that an interest in land is to be transferred to the new company, the charity trustees should take independent legal advice on the terms of the lease, licence or other agreement to occupy the property as this may affect or be affected by any planned transfer. In particular there can be difficulties with leasehold interests where the landlord has the benefit of covenants with individual trustees and prefers this arrangement to a covenant with a limited liability company. 16. Finally, there may be issues to consider in relation to employee contracts; insurance policies; grants or other contractual obligations. Transferring these to the new company may not be straightforward. Legal advice should always be taken in these circumstances. 17. This again is by no means an exhaustive list, and the charity trustees are strongly recommended to seek advice from their own legal and financial advisers about establishing a company and whether this is in fact the best structure for them to adopt. 18. If the charity trustees wish to proceed with incorporation they will need to follow the procedure set out below. 19. If they are able to successfully form, and subsequently register, the new charitable company they should then be able to pass across the assets from the original charity to the new charity and possibly wind up the original charity so that we can remove it from the Register. How to proceed with an incorporation 20. If the charity trustees have decided that incorporation is the most effective way of managing identified risks they will need to do the following: 5

8 Check that the original charity s Governing Document contains a power to dissolve and transfer assets to a charity with identical or similar purposes (but see also paragraph 24 below). Check whether the original charity holds any money, shares or land/buildings which are subject to a particular restriction. In other words does the original charity have any permanent endowment (assets which cannot be turned into cash and spent) or special trusts (assets which have to be applied for a special or particular purpose and which cannot be applied for the general purposes of the charity)? See also paragraph 26 below. If the original charity has restricted assets of this type, the charity trustees should approach our Advice and Orders team for further advice prior to completing this pack. Prepare the Memorandum and Articles for the new company. The objects should be the same as the original charity. If they are going to be modernised or altered in substance, the application may take longer to prepare and for us to process. This is because we may need to consider whether the proposed changes are likely to be within the reasonable contemplation of those who have supported the original charity. In all cases we will review the objects of the original charity to ensure that they remain charitable under current law. We have produced a model Memorandum and Articles which contains the basic administrative provisions and powers required by a charitable company. This is available from Charity Commission Direct ( ) or from our website: Consider how they are going to prepare accounts. We have produced some basic <Guidance on Accounting> for charities which incorporate which can be found on our website. 21. If the charity trustees are satisfied that they have the necessary powers and provisions and that they have an adequately constructed Memorandum and Articles of Association they should register the company at Companies House (but see 2 nd bullet point below). They should then submit: a certified copy of the Memorandum and Articles of Association for the new company; a copy of the Certificate of Incorporation issued by Companies House (except in cases where the name of the company includes the word charity, charities or charitable we will accept a draft memorandum and articles, the company being incorporated at Companies House once the name has been agreed). See also paragraph 24 below; the application form contained in this pack; and the accounts of the original charity to Charity Commission Direct, PO Box 1227, Liverpool L69 3UG. 22. We will then consider whether the new company is in fact charitable and can be entered onto the Register of Charities. The minimum requirements for registration for all charitable companies are: 6

9 an annual income of 1,000; or the use and occupation of land and buildings (we mean formal occupation which could lead to the charity being liable for any rates due on that property). 23. Because it is unlikely that the new company will have any assets of its own we are prepared to treat the assets of the original charity which are to be transferred to the company as contributing towards meeting either the 1,000 or use or occupation and property thresholds. The application form indicates how to let us know which of these applies in your particular case. 24. We do not normally accept applications without a certificate of incorporation. However, if the objects of the new charity are going to be significantly different from those of the original charity, the trustees may wish to seek our prior agreement to accept a draft memorandum with the application so that any necessary amendments can be made with the minimum of expense. Applications made without a certificate of incorporation and without prior agreement will be returned. 25. Once we have determined that the charitable company is indeed charitable and have agreed to register it (registration cannot occur without a certified copy of the certificate of incorporation), the charity trustees can dissolve the original charity in accordance with their existing dissolution clause and formally transfer the assets to the new charity. However, before doing this the charity trustees will need to consider whether this would put at risk any income expected by the charity and the Deeds of Covenant or possible future legacies (please see paragraphs 11 and 12 above). We recommend that any resolution for the dissolution of the original charity contains a date on which the dissolution and transfer of assets will be effective. There is a risk that if no date is specified the resolution is effective immediately, and the company may not be in a position to accept the assets at that point. Common problems 26. There are five common problems which charity trustees encounter when trying to incorporate an existing charity: Problem: No power of dissolution. Solution: If the original charity has no permanent endowment or special trusts, it may still be able to transfer its assets to the new charity by making a payment of them to the new charity in furtherance of its objects. In these cases the objects of the two charities must be the same (or those of the original charity must be wider) and we recommend that members of the charity (if any) are consulted before the transfer is made. Problem: Objects of the company are substantially different. Solution: It might be possible for the transfer to go ahead, but the current assets are likely to be restricted to the original objects and held on special trusts accordingly. 7

10 Problem: Objects have changed and are not expressed in charitable form. Solution: We will discuss with the charity trustees what the company will actually do and then we can determine whether charitable objects can be prepared. Problem: Dissolution clause requires the assets to be transferred to a named charity, person or organisation (known as a gift over) or for specified charitable purposes. Solution: It is unlikely that a straightforward transfer of assets and/or services to the new company can proceed. However, it may be possible to transfer assets by grant in furtherance of the objects. However, this would only be possible if it was in keeping with the original gift and was not just a means of avoiding the terms of the dissolution clause. As an alternative we may be able to advise on how the charity trustees can address the risks that have led them to believe that incorporation was appropriate. In these circumstances the charity trustees should contact our Advice and Orders team for further advice. Problem: The original charity has permanent endowment or other restricted funds. Solution: It is likely that all the expendable assets of the original charity held for its general purposes can be transferred to the new charity, leaving the permanent endowment and other restricted funds to be held as separate charities. In many cases the company can be appointed as trustee of that charity. If this applies to your charity you should not use this pack, but should approach our Advice and Orders team for advice (Charity Commission Direct will give you the details: ). What happens after we have received your application 27. Once we receive your application we will assess whether the objects declared for the company are charitable and whether it meets the requirements for registration. If your application is successful we will register the new company with its own individual registered number. Where to send your application 28. Please send your completed application to Charity Commission Direct, PO Box 1227, Liverpool L69 3UG. You should expect to get a response within fifteen working days. We expect to complete applications within an average of eighty-eight working days. This allows us time to enter into any discussions or negotiations with the charity trustees prior to registration. 29. If all the information we have asked for has been provided within this application pack it is likely that we will be able to process your application in a considerably shorter period. 8

11 Frequently asked questions Q: Will the new company have the original charity s registration number? A: The new company will be allocated a unique registration number. This is because the two charities are legally distinct. The new company will be liable for registration in its own right (in accordance with Section 3 of the Charities Act 1993). Q: Can we use the incorporation process as an opportunity to provide trustee benefits not available under the governing document of the unincorporated charity eg Trustee Indemnity Insurance? A: Possibly, provided that the purpose of the incorporation is not just to introduce these and the dissolution clause of the original charity does not contain a specific restriction to prevent this. However, if the company is to have a new power to remunerate charity trustees, we shall need to consider whether this affects the public character of the charity and is otherwise permissible. Completing the application form 30. By completing the application form in this pack you will have set out all the information we need to assess whether: it is possible for the unincorporated charity to transfer assets to a new company; the company is established for exclusively charitable purposes; and there are any restrictions of which the charity trustees need to be aware. Winding up the unincorporated charity 31. If the trustees are satisfied that the original charity can be wound up, they should follow the procedures set out in its governing document. If these are unclear staff in Charity Commission Direct ( ) may be able to give general advice. Once the original charity has been dissolved the trustees must send us a copy of the appropriate resolution and a copy of the final accounts. We will then remove the charity from the Register. Our guidance on winding up (SCU1) on our website may be helpful. 9

12 Notes on completing the application form 1. When completing the application form (APP 2) and the declaration form (DEC 2) please write clearly or in UPPER CASE letters. 2. If you have any difficulty in completing the form or you would like some further information about the process please call Charity Commission Direct on Please note that when completing this application form certain details as indicated, will appear on the Public Register of Charities available on our website. 3. The Commission has a statutory duty to register charities. The information requested in the application form is required by us to ensure that the new company meets the criteria for registration as a charity and to ensure that assets which the charity trustees expect to be able to pass across to the company can in fact be so transferred. Please note, that it is an offence under Section 11 of the Charities Act 1993 knowingly or recklessly to provide us with false or misleading information which could reasonably be expected to be used by us in order to discharge any of our statutory functions under the Act. 4. The declaration form contained in this pack is the same as the declaration form contained in our standard application pack for registering a new charity. Even though the charity trustees of the new company are likely to be the same people who are charity trustees of the original charity we still require these details to be completed in full. The names of the charity trustees will appear on the Public Register of Charities. 5. In accordance with our general policy and procedures we ask all charities working with children or vulnerable adults to consider whether they need to make checks with the Criminal Records Bureau for charity trustees, employees, volunteers or other persons who may have access to children or vulnerable adults. Information about whether or not the charity trustees should undertake such checks is available from the CRB website ( As a matter of good practice we would encourage the charity trustees of all charities who either are or may work with children or vulnerable adults to carry out as many checks as possible, and as are reasonable, to ensure the safety of beneficiaries and charity trustees, employees and volunteers for whom they are responsible. We also ask all such charities to have a Child Protection Policy and we like to have a copy of that submitted with all applications. This need not be a complex document, but should set out basic rules for reporting incidents, dealing with reports of incidents, and mechanisms to protect both beneficiaries, charity trustees, employees and volunteers where suspicions or accusations are raised. Advice on child protection can be obtained from a variety of sources including local Social Services, Department of Health and charities such as the NSPCC. 6. The Preliminary Checklist should be completed and returned to us along with the application form. 10

13 Preliminary Checklist Before completing the application form please work through the following checklist as this will help you to decide whether or not you are in a position to make a formal application to us and whether there are likely to be any problems with dealing with your application. Yes No 1. Are the objects of the original charity substantially the same as the objects of the new company? 2. Are the objects of the original charity substantially the same as the objects of the new company? If not, please explain why in the box below 3. Is there any restriction in the Governing Document of the original charity on how it may deal with its assets (eg is there a gift over to another charity - see paragraphs 20 and 26)? 4. Is there any permanent endowment (see paragraph 20)? 5. Does the original charity hold any funds or other assets on special trusts or administer any other charities? If so, please explain how these will be dealt with after incorporation 6. Does the Memorandum and Articles of Association contain a new power to provide benefits for charity trustees for example Trustee Indemnity Insurance? 7. Was the agreement of all the trustees (or of all members as well as the trustees where the charity has a membership) or as many of them as is required by the governing document of the original charity obtained prior to incorporation? 8. If the company has no assets of its own is it reliant on a transfer of assets from the original charity? 9. Has an action plan/timetable been drawn up for the transfer of assets to the new company? (If so, please enclose a copy with your application.) Please enclose this form with your application. 11