What is an ‘incorporated’ charity?
An incorporated charity is one which is set up with a corporate structure. The corporate structure which will most likely be used in Northern Ireland is a company limited by guarantee (but there are others).
It can help to understand corporate structures by comparing them to unincorporated structures.
An unincorporated structure has no ‘legal personality’ and so cannot enter into contracts in its own name. Trustees have to do this on behalf of the charity and become personally liable if something goes wrong. As a charity grows, it may become preferable for the charity to be incorporated so that it can enter into contracts on its own behalf, protecting the trustees from this liability, as long as it is in the charity’s best interest to do so.
There are pros and cons to both corporate and unincorporated structures.
Main differences between unincorporated and incorporated charities
No legal personality
One corporate legal personality
Organisation cannot enter into contracts in own name/ on own behalf
Can enter into contracts in own capacity limiting trustee exposure/liability
Not eligible for certain funding
Benefit from certain funding not available to unincorporated charities
Trustees enter contracts and are personally liable
The corporate vehicle is liable
Simpler structure with less bureaucracy, e.g. association or trust
More complex structure with other regulators / additional reporting requirements, for example reports to Companies House
Why would an unincorporated charity decide to incorporate?
There are many reasons why the charity trustees of an unincorporated charity may consider and ultimately decide to become incorporated. Charities may be required to become incorporated before they can apply to certain funders, or the charity trustees may find that the charity is in control of assets, property or a growing workforce which are better managed and protected under a corporate structure.
Important points to consider before deciding to incorporate your charity
Incorporation is a complex process which involves careful planning. It is not simply a case of setting up a new company and running it.
When taking any decision which affects the charity, the charity trustees have a legal duty to act in the charity’s best interests, comply with charity law and comply with the charity’s governing document. If the charity trustees decide to incorporate the charity, important steps will have to be followed:
- A new company will have to be established formally to act as the vehicle for the corporate structure. It should have charitable purposes similar to those of the unincorporated charity, so that it can take on its assets etc.
- This new company will have to be registered with the Commission as a new charity. In law, the new company is a structure entirely separate from the unincorporated charity and cannot simply take over its charity number (NIC number). An expression of intent form must be submitted for the new company.
- The assets from the old charity must be properly transferred to the new charity. Depending on the assets to be transferred, and the people involved in the old and new charities, various consents may be required from the Commission; if these are not sought, the transfers may be open to challenge.
- Usually, when the old charity has transferred its assets, it will be considered to have wound up and a closure notification form must be submitted to the Commission. This allows for the old charity to be removed from the register.
- The new charitable company will also have to follow company law as well as charity law.
- There are different accounting and reporting arrangements for companies which must then be followed.
As is clear from the above, the incorporation process consists of a number of formal steps. For that reason, charity trustees are strongly advised to contact a helper group and to seek professional, independent legal advice before starting the incorporation process. If the steps are not carried out properly, the charity trustees may find themselves in breach of the law, and open to challenge.
When might the Commission be involved in an incorporation?
Authority to make a transfer
Although a new company has been set up, there may not be a power of transfer within the unincorporated charity’s governing document (for example, a constitution or trust deed).
The necessary authority can usually be granted by the Commission under Section 46 Charities Act (NI) 2008 if applied for by the charity trustees using the guidance and application form here: Authorising Transactions.
It is crucial that the application form gives details on how the charity’s interests would be served by the proposed incorporation.
If such a transfer is expressly prohibited by the governing document, and the charity cannot change this rule itself, you may need to seek a scheme from the Commission to formally change the governing document and allow for incorporation/transfer.
The charity trustees involved
When setting up the new company, charities very often place their current (unincorporated) charity trustees as Directors of the new company. As mentioned above, however, the new company is legally separate from the unincorporated charity, and the people involved will have separate duties to both organisations.
This can, therefore, lead to ‘conflicts of interest’ when they are making decisions. For example:
- When an unincorporated charity trustee decides that assets should be transferred to a company of which they are a director, they are also deciding to give themselves the benefit of limited liability which the company affords them;
- When a charity trustee (director) of the new company decides to grant an indemnity to the unincorporated charity’s trustees, they are in effect indemnifying themselves in their capacity as unincorporated charity trustee.
There are ways to avoid these conflicts, for example appointing different people to be company directors or keeping the number of conflicted trustees to a minority so the conflict can be managed.
Where the conflict cannot be managed, the Commission can approve the transfer / granting of an indemnity even though there is a conflict of interest. Such a sanction can be granted under Section 46 Charities Act (NI) 2008 if applied for by the charity trustees using the guidance and application form here: Authorising Transactions.
It is crucial that the application form gives detail on how the charity’s interests would be served by the proposed incorporation / indemnification of charity trustees.
The assets / people involved
When setting up the new company, charities very often place their current (unincorporated) charity trustees as Directors of the new company. This means that transactions between the unincorporated charity trustees and the company (for example when transferring assets) can also be considered as transactions between the directors and the company.
Company law sets out rules around certain transactions with directors, and some of these require approval by the company’s members.
Where a company is a charity and it intends to enter into certain transactions (for example property transactions) with its directors which require approval by its members, written consent is first required from the Commission before the members can give such an approval.
These transactions include the transfer of ‘substantial non-cash assets’ as defined in company law. This means that the Commission’s consent is likely to be required if the unincorporated charity trustees / company directors are the same people and:
- They wish to transfer land/buildings to the company;
- The company wishes to grant an indemnity to its directors (in their capacity as unincorporated charity trustees)
As is clear from the above, the incorporation process can include a number of formal, legal steps. For that reason, charity trustees are strongly advised to contact a helper group and seek professional, independent legal advice before starting the incorporation process. If the steps are not carried out properly, the charity trustees may find themselves in breach of the law or their governing document, and open to challenge.
*Guidance on annual reporting, and whether final accounts are required, is available here.