Cue a new legal entity

The idea of a new legal entity administered by the Charity Commission rather than Companies House was made a reality as part of the Charities Act 2011. The specific rules allowing charitable incorporated organisations (CIOs) to be registered have just come into force and the first applications have been made.

As the CIO format beds down some advantages will emerge, but I would recommend caution

Most arts organisations which are charities operate through a company limited by guarantee (CLG) and are therefore governed by company law. CIOs will not be governed by company law but by a completely new regime set up by the Charity Commission. CIOs have been advocated for the reason that there could be benefits in having only one regulator rather than two, but it is important not to exaggerate the ‘gap in the market’, as generally speaking CLGs are tried and tested and are sufficiently flexible to deal with specific requirements.
 

Timing: The Charity Commission is accepting brand new registrations now. However, conversions of existing charities to CIOs are being staggered over a period of time. Unincorporated charities which wish to become CIOs should not apply before 1 March and only then those with an income of over £250,000 should do so. Applications from those with an income under £25,000 are not welcome before October. For those who wish to convert a CLG to a CIO this will not be possible until at least the beginning of 2014. There is no provision for conversions from CIOs to CLGs. The issue for conversion is in practice not so crucial as it is always possible for a shell CIO to be set up and all assets and liabilities transferred into the CIO under a transfer agreement and vice versa for transfers to a CLG. Transfer agreements require careful consideration and are administratively more complicated than using a conversion process, although may be quicker.
 

Model constitutions: The Charity Commission is keen to promote the use of its model constitutions for CIOs (these can be found on the Charity Commission website). There are two forms: one for CIOs where the trustees and the members are the same people; the other is where the members will be drawn from a wider group, i.e. a membership CIO. These models have a number of options, but beyond this if any amendments are made CIO registration will take longer.
 

The role of members: The role of members is significantly different for CIOs in that there are fewer automatic rights than for members of companies. Members of CIOs have no right to call meetings or remove trustees although these can be provided for in the CIO constitution. One advantage is that there is no obligation to make the register of members open to the public – unlike for registered companies.
 

Date of existence: When registering a charitable company you first set up the company and then apply for registration as a charity. As a result, the company is in existence throughout the period of the charity application. CIOs only exist once the application process has been completed. This difference can be significant. You may want to make applications to trusts and foundations and start employing people as soon as possible. For instance, an application for a work permit for a foreign national is likely to be possible only after employment has begun.
 

Charges register: There will be a no charges register for CIOs in the same way that there are none for unincorporated associations and royal charter bodies. We have canvassed the opinion of banks and there is a mixed picture. For CIOs which are likely only to offer land as security this is unlikely to be a problem as lenders can rely on the Land Registry; overdrafts are generally unsecured. A significant proportion of arts organisations which are unincorporated organisations are grant-giving trusts for whom a charges register will not be an issue and which are unlikely to want to convert to a CIO. Nevertheless, there may be some banks or lending organisations that may prefer a charges register with CLGs.
 

I know that many arts organisations have been looking at CIOs, whether with a view to converting or setting up a new charitable entity. There is more flexibility for CIOs in that the constitution, like a trust deed, is a single document that dictates how the CIO regulates its own activity and its relationship with members. The fact that the Charity Commission is so keen to persuade applicants to use its model constitutions undermines this to some extent. As the CIO format beds down some advantages will emerge, but I would recommend caution. The Charity Commission has had savage cuts and there must remain a doubt as to whether it has the resources to respond to the needs of CIO applications. Only time will tell.
 

Sean Egan is a Partner and Head of Arts and Media at Bates Wells & Braithwaite London LLP.
www.bwbllp.com
www.charity-commission.gov.uk