Charitable companies limited by guarantee
The charity is the best-known form that a community company can take. A charity is set up to fulfil one or more charitable 'objects', set out in the charity's governing document. The objects of the charity must conform to the provisions set out in the Charities Acts, as must the manner in which the charity is run in general.
As charities are generally prohibited from trading (except as an incidental part of its main function) charities often set up a separate company for this: a charitable trading company. Charities are subject to a strict regime of regulation by either the Charity Commission For England and Wales, the Office of the Scottish Charity Regulator or the Charity Commission for Northern Ireland. If a charity's annual income is under £5000, it is defined as a 'small unregistered charity' - not registered with the Commission, but still subject to its regulatory powers - and such charities are still usually eligible to be recognised as charitable for tax purposes by application to HMRC. A small unregistered charity must not hold itself out as being registered, but can still refer to itself as 'a charity.'
If it fulfils the criteria for doing so, an organisation can apply to the Commission to be registered as a charity and so receive a charity number. It can then hold itself out as a charity registered with the Commission.
Charities do not have to be companies; however, it is becoming increasingly common for them to be so. One point which is important to understand is the difference between unincorporated charitable associations and charitable companies (and CIOs), which are incorporated bodies conferring limited liability and having a separate legal personality from the people who run them.
Charities have historically been run as unincorporated associations. A trust is the 'classic' form under which charities have operated for many years, and is a type of unincorporated body governed by a document called a trust deed. The people who run the charity and are responsible for its finances are called the trustees.
As the charity is not a body corporate, and therefore is unable to own property in its own right, it is up to the trustees to hold any property 'on trust' for the charity. This means that the trustees have legal title to the property, but the 'real' (i.e. the 'equitable') owner is the charity. This poses a number of potential problems. For example, the trustees can become personally liable for any debts incurred in the course of the charity's business. It is also often much more difficult for the charity to transact business with third parties, as it cannot sign documents in its own name (as a company would be able to do via a signatory) and it does not have the legal title to any of the property or funds used in its day-to-day running. This means that most of the business needs to be done by, and in the name of, the charity's trustees rather than the charity itself.
The 'charitable company' (not to be confused with the 'charitable trading company') is a form under which charities can now be set up and to which existing charitable associations or trusts can convert. In either case, a company limited by guarantee is set up with special charitable articles, and is registered both at Companies House (as a company) and with the Charity Commission as a charity in its own right. Unlike an unincorporated association or trust, a charitable company, as an incorporated body, can own property, will be liable for its own debts, and can transact business with third parties (i.e. without the need for the trustees to do so on its behalf). As a limited company, the charity will have directors and members; the directors will also be trustees of the charity for the purposes of the Charities Act. The great advantage to those running the charity is that as a limited company, only the charity is liable for its debts and the people behind it are in most circumstances fully protected by limited liability. Charitable companies must make returns and submit accounts on an annual basis to both Companies House and the Charity Commission, and must also comply with both charity and company law.
Charities can now also take on the form of the Charitable Incorporated Organisation, or CIO, as an alternative corporate structure to a company limited by guarantee. CIOs are regulated solely by the Commission.
One of the most important parts of the constitution of any type of charity is its objects. As the name suggests, this is a list of aims and objectives, and includes (among other things) what the charity is setting out to do, who or what will be the beneficiaries of its work, and how the charity is to go about achieving what it wants to do. The objects of a charity must be set out in the articles of association (if the charity is a company) or in the trust deed (if it is a trust).
The objects of every charity must be 'charitable' as defined by law, and furthermore they must also fulfil the 'public benefit test' as set out in the Charities Act. For further information on this, please see our page on charity legislation.
We provide a full range of services from the incorporation of new charitable companies to drafting articles, appointing or removing trustees and helping charities comply with ongoing Companies House requirements. We can also help existing charitable trusts convert to incorporated status. For more details, please do not hesitate to contact us.