CIOs: a review
It is now 18 months since the Charity Commission began to register Charitable Incorporation Organisations (CIOs). It is also 6 months since all organisations could register as a CIO irrespective of income level. There are now more than 2,100 CIOs registered with the Charity Commission. Although the introduction of the CIO has given many charities a simpler way to benefit from incorporation, there continues to be some areas of uncertainty.
What is a CIO?
The idea for the CIO was included in the Charities Act 2006 but was not implemented until the 2011 Act. A CIO is an incorporated legal form specifically for charities. Being incorporated means that the charity has legal personality and can enter into legal relationships in its own right without having to do so through its management committee or trustees. This also means that in most circumstances the CIO itself, rather than its members or trustees, will be responsible for its debts and other liabilities.
Before the CIO was introduced, the most common type of incorporated legal form used by charities was the company limited by guarantee (CLG), which could be adapted for charitable status. The CIO mirrors the two-tier governance structure of a CLG.
Incorporation and registration
To set up a CIO, the founding trustees apply to the Charity Commission, which results in incorporation and registration as a charity. In contrast, a CLG is first incorporated by Companies House and then registered with the Charity Commission once it can demonstrate that it has a gross annual income of at least £5,000. There is no longer a minimum income requirement for registering a CIO, which makes it an attractive option for smaller charities.
It will in due course be possible to convert from a CLG to a CIO, but this is not currently available. It is expected that the detail of how this will be implemented will not be available until late 2014.
Administration and filing requirements
CIOs are regulated by the Charity Commission and must comply with the Charities Acts and CIO regulations. In comparison, a charitable CLG is regulated by the Charity Commission and Companies House and therefore must also comply with company law. Not being subject to company law reduces the regulatory burden for CIOs. However, it is our experience that, in most cases, the amount of administration needed to run a CLG is not significantly greater to outweigh some of the disadvantages of the CIO (see below).
Lending
Unlike Companies House in respect of companies, the Charity Commission does not maintain a register of charges secured against CIOs’ assets. This means that a bank has less information and protection when lending to a CIO. However, this issue is less likely to apply to loans secured against land because the bank can register a charge at HM Land Registry.
Bank accounts
Knowledge of CIOs appears to be filtering out and we hear that banks are getting more used to providing accounts for CIOs. Some banks are even allowing unincorporated associations to keep their bank accounts following reconstitution as a CIO. This helpfully resolves the problem of otherwise having to set up a new account and notify members/donors to change their direct debits or standing orders.
Winding up
There remains some uncertainty about what is meant to happen to a CIO on insolvency and winding up. The creditors of a company which has been struck off can apply for the company to be restored to the register of companies. In contrast, there is currently no analogous procedure for CIOs although it is hoped that the Commission will make information publicly available about prospective dissolutions.
Conclusion
The CIO is fast becoming established as an attractive option for new charities or unincorporated charities which wish to reconstitute. Importantly, it has the benefit of legal personality and limited liability status. However, there remain some uncertainties and time and we wait to see how these potential issues will be resolved.
For more information please contact Joanne Davison or 0191 211 7958.