Third Sector Legal Structures & Trading – The Essentials

Tuesday 8 October 2013

Giselle Davies, Partner

Introduction• Typical third sector structures; key features and

examples• Legal structures handout• The CIO; what is it and when to use it• Subsidary trading companies; why and how• Q&A

Why does structure matter?• (Non) existence of legal personality• Potential trustee liability• Plethora of possible structures• Essential distinction is (un)/incorporated

Typical legal structures • Trust• Unincorporated Association• Limited company• Industrial & Provident Association• Royal Charter Corporation• Statutory Body• Charitable Incorporated Organisation• “Social Enterprise”

Trust – Features & Issues • Governing document varies (trust; deed; will;

conveyance; lease; scheme)• Unincorporated = no legal personality• Contracting party = individual trustees• Possible personal liability issues• Usually privately set up or follows public appeal• Rarely used for trading

Trust – Examples & Uses • Privately set up (individual / families / companies):

• The Bute Charitable Trust RCN285226• Grant making:

• Waterloo Foundation RCN1117535• Trusts of land:

• Kenfig Corporation Trust RCN 214084• Public appeals:

• The Aberfan Memorial Charity RCN 701570• South Wales Miners Welfare Trust Fund RCN 507439

Unincorporated Association – Features & Issues • Governing document = Constitution and/or Rules• Member organisations• Charity trustees = Committee / Council / Executive• Unincorporated = no legal personality• Contracting party = individual trustees• Possible personal liability issues• May have custodian / holding trustee(s) for

property• Often trade in furtherance of objects

Unincorporated Association – Examples & Uses • Community / village association:

• Grangetown Community Concern RCN 511306• Common purpose (welfare, history, music etc):

• Abergavenny Local History Society RCN 1098582• Branches:

• 1691 Local Women’s Institutes registered at Charity Commission

• Church / Chapel congregations:• Various including Jehovah’s Witnesses

(Charitable) Company – Features & Issues• GD = Memorandum & Articles of Association• Registered at Companies House• Limited by guarantee / shares• Incorporated = a legal “person”• Contracting party = the charity• Directors = charity trustees (ignore what they are

called!)• Directors have some liability protection• Wide or restricted membership / shareholding

(Charitable) Company – Uses• Trades in furtherance of objects• Delivers services• Employs staff• Enters into contracts• Examples:

• Ty Hafan• WMC• RVS• National Botanic Gardens

(Charitable) Industrial & Provident Society – Features & Issues• Governing document = Rules• Registered with FCA (not Companies House)• Incorporated = legal personality• Executive Committee = Charity trustees • Contracting party = the Society• Liability similar to company directors• Members / shareholders• Traditionally intended for third sector trading

(Charitable) Industrial & Provident Society – Examples & Uses• Housing Associations

• Cardiff Community Housing Association IP21667R• Community service providers:

• Community Lives Consortium IP26673R• Beneficiary Co-operatives

• Co-operative Schemes for the Elderly Ltd IP025165

Less Common (Charity) Structures Royal Charter Corporations• Governing document = Royal Charter• Incorporated • Executive Committee / Board = Charity trustees• May have members• May be trading in furtherance of objects• Various uses and examples eg BBC; National

Museum of Wales; Arts Council of Wales

Less Common (Charity) Structures Statutory Corporations• Governing document = statute• Incorporated • Charity trustees will be executive body• Various uses and examples – eg education;

religion; public benefit• eg Cardiff & Vale College

• May be trading in furtherance of objects

Charitable Incorporated Organisation• Governing document = constitution• Wide membership or foundation models• Registration with Charity Commission only• Registration grants incorporation• Contracting party = the C.I.O• Trustee liability = similar to company directors• “Conversions” from other structures possible

“Social Enterprise”• No legal definition• A variety of legal structures• May be a charity• Common features:-

• No distribution of profits / use profits for benefit of community

• Conducts a trade• Social Enterprise Mark

Summary• See legal structures handout• No “one size fits all”• Tax treatments can differ• Possible to “convert” from one to another if have

to but not easy, cheap or quick• Vital to select correct structure• Is the CIO a panacea?

What is a CIO?• New legal form only for charities• Included in Charities Act 2006, in force in 2013• Corporate body not unlike a company• Automatically charitable• Attracts same tax treatments as charitable

companies

Is a CIO the right choice? Advantages of CIO•Charity Commission (not Companies House) simultaneously grants

• Incorporated status AND• Charitable status

•Absence of Companies House involvement means:• Only 1 regulator – Charity Commission• No knowledge of company law needed• No fines / penalties for late filing

Is a CIO the right choice? Disadvantages of CIO•Set up time – 40 working day turnaround•Lack of awareness outside sector•Applicable legislation not gathered in one place•No charges register – how will funders be satisfied?•Requirement to file regardless of size•Loss of charity status means organisation immediately ceases to exist•Must have two signatories (unlike company)

Why would a new charity be a CIO?• Model constitutions available• Free registration at Charity Commission• Liability protection for trustees• Own legal identity• It can contract, employ, own property• Don’t need to understand “company” law• Possible lighter touch regulation

The CIO in detail - Model CIO Constitutions• Two versions available:

• Foundation model• Association model

• See Charity Commission website• No interactive model available• Use of model recommended by Commission• Language determined by principle office• No Welsh translation available (yet)

Which model Constitution to useFoundation model •Akin to trust or company where all members = directors•Use where trustees = members•Run by small group of people•Trustees will make key decisions•No time limit on length time trustees serve•Trustees will usually appoint trustees

Foundation Model

Constitution & Dissolution

Trustees

Management Function

Members

CIO

=

Which model Constitution to useAssociation model •Akin to unincorporated association or company with wide membership•Use where charity wants a wider voting membership•Members will make certain decisions•Members will appoint some / all trustees•Trustees serve for fixed terms

Association Model

Constitution & Dissolution

Trustees

Management Function

Members

CIO

≠

Appoint / Elect

Both Constitutions must include• Name of CIO• Name of 1st trustees• Exclusively charitable objects for public benefit• “Standard charity trustee provisions”

• (retirement, removal from office, meeting procedure, personal benefit)

• “Standard member provisions”• (retirement, termination of membership, general meeting

procedure)• If to have a seal, details as to how it is applied

Both Constitutions must include• If proxy appointment allowed, detail on

appointment, rights and termination• If postal voting allowed, details as to how operates• If alternatives to decision at GM or resolutions at

GM, detail alternatives• If alternatives to decision at trustee meeting or

resolution at trustee meetings, detail alternatives• If weighted voting, what weighting is• Whether electronic communications are permitted

Main differences between two Constitutions • Foundation: members = trustees• Association: not all members are trustees• No membership fees in Foundation• No requirement for AGM in Foundation

CIOs in practice• Members register• Trustees register• No charges register so internal register instead• Change “charity” to “CIO” on publications

Trading Subsidary Companies• Not always necessary• Needed to avoid tax on certain trading activities• Share or guarantee company can be used• Investment by the charity• Arms length relationship - agreement / contract

with parent• Trading company gift aids donations to the

charity to save tax

Trading Company not required for:• Charity “primary purpose trading”• Ancillary to primary purpose• Charity “small” trading• Charity lotteries• Charity sale of donated goods• Charity letting of rooms (with no services)• Permitted “events”

Trading Company – Examples & Uses• Trading outside HMRC charity exemptions• Charity shops selling bought in goods• Ring fencing risk• Activities outside main objects eg for an associated

“social enterprise” / CIC

Trading Company – Examples & UsesGuidance:

http://www.charity-commission.gov.uk/Publications/cc35.aspxhttp://www.hmrc.gov.uk/charities/guidance-notes/annex4/sectiona.htm#10

Cardiff Derby Nottingham

Any questions?

Thank you

Giselle DaviesDD : 029 2039 1797 giselle.davies@geldards.com