Incorporated Organisations

An organisation that is a corporate body can enter into contracts, hold property, and take part in lawsuits, in its own right. It enjoys limited liability. This means that if it has more debts than it can pay and is wound up, its members as individuals are only liable for their shareholdings or the amount they have each guaranteed. Incorporated organisations are more complicated to set up, and more closely controlled by the law than unincorporated associations.

There are four sorts of incorporated structure suitable for voluntary organisations:

Company Limited by Guarantee
Community Interest Company (CIC)
Charitable Incorporated Organisation
Community Benefit Society (formerly the Industrial and Provident Society)

Companies Limited by Guarantee

A Company Limited by Guarantee does not have shares or shareholders, and cannot distribute profits. Instead, it has members, who may pay a subscription and are each liable for a limited sum if it is wound up (the guarantee). The members elect a board, or committee, or directors, and can remove them but the board has day-to-day control. A limited company’s rules are set out in a legal document called the memorandum and articles of association. This must be carefully drafted, preferably with legal advice, because the company has no power to do anything not covered by it. There are templates available on the Government website. The Companies Acts lay down rules about such things as Annual General Meetings, accounts, and audit. Setting up a company and meeting these rules, involves paperwork and has a cost involved.

Pros

The structure and its day to day operation are widely understood
Quick and easy to establish with low registration fees
Can be either charitable or non-charitable (e.g. as social enterprise/CIC). If charitable, all usual charity tax reliefs are available
Flexible as to the number of members and whether subscriptions charged.

Cons

No possibility of equity investment – cannot issue shares
Although filing with Companies House is straightforward, there are high penalties for delay/failure to file information
If charitable, it would be registered with both Companies House and the Charity Commission – need to file information/accounts with two regulators with different requirements.

Community Benefit Societies (formerly Industrial and Provident Societies)

Incorporated Industrial and Provident Societies conduct business for the benefit of their community. These are not-for-profit organisations with charitable purposes and a built-in democratic structure. They must give all members an equal say in the running of the Society. The society has corporate status and can have a share and loan capital, but must pay only moderate interest on any loan capital. Industrial and Provident Societies for the benefit of the community cannot register with the Charity Commission but must register with the Financial Services Authority. They can apply to the Inland Revenue Charities Division to be classed as charitable for tax purposes. (for example a nursery school) They are accountable to the Financial Services Authority FSA (see contact details at the end). The FSA can give information about registration as an industrial and Provident Society, including details of ‘promoting societies’, who provide model rules and offer the quickest way of registering.

Pros

Can be good for social investment: each member can buy up to £20,000 of shares in the society and other IPS could invest
Strongly recognised amongst particular sectors – particularly where the co-operative structure is valued
Can be charitable – but cannot be registered with the Charity Commission (subject to change with Charities Bill)
If charitable can obtain many of the tax breaks available to charities e.g. minimum 80% business rates reduction and Gift Aid on donations.

Cons

Weak ‘brand’ – the existence of this structure and its key characteristics are poorly understood even in the charity sector. That lack of recognition can be more pronounced – and inconvenient – when dealing with commercial bodies such as banks
Administration – registration is with the Financial Services Authority rather than Companies House and administration procedures are quite different to those of companies
Cost – registration with the FSA can cost between £40 and £950-payable each year.

Community Interest Company (CIC)

Community Interest Companies (CICs) are limited companies that exist to provide benefits to a community, or a specific section of a community. The CIC has the flexibility of the familiar company form and access to a range of financing options, so maybe appropriate for those working for a social purpose. Its key feature includes an asset lock and a community interest statement. The CIC uses a memorandum and articles as a governing document.

CICs are run by a board of directors that can receive payment for their contribution and can include the founder of the organisation as a paid director. The founder can work alongside the other directors and be part of the decisions and future of the organisation although not all the directors have to be involved in the delivery of the activities. To be 'funder friendly', CICs need a minimum of three, unrelated (by blood, marriage or business association) directors and have a transparent decision-making system.

To register as a CIC you must also register as a company limited by guarantee (it is possible to register by shares but this action isn't 'funder friendly'). CICs are subject to dual regulations by both the CIC regulator and Companies House. The CIC is registered as a company first and then converted by Companies House in the same transaction. When registering with Companies House you will need to provide additional documents, including a community interest statement describing your social purpose. CICs should not be confused with charities. CICs cannot have charitable status but a charity can own one.

Pros

Flexibility to pay directors
Not restricted to objects/purposes, which qualify as charitable.
Can fundraise and accept donations

Cons

Does not receive the tax advantages extended to charities e.g. will not obtain business rate relief but may qualify for discretionary relief
The scope of the community interest test can be ambiguous.
Open to a small range of funders than a charitable organisation

Charitable Incorporated Organisations (CIO)

Charitable Incorporated Organisations (CIOs) are charities that provide benefits to the community, or a specific section of the community. They operate on a business model often trading in services or goods which can make a surplus which is then used to provide further benefit or services. CIOs are based on charitable objects which guides the mission of the organisation and are listed in the Constitution (governing document) when registering.

CIOs are run by a board of trustees who oversee the running and strategic mission of the organisation and do not deliver the services directly. Only in some rare cases can the CIO employ the founder and allow them on the board. The founder has to relinquish their power to the board and take up a position as an employee. This means they follow the guidance of the board. The trustees are voluntary and are only paid in exceptional circumstances.

CIOs are registered with the Charity Commission through a series of questions, scrutiny and the submission of appropriate paperwork.

Pros

One regulator – the Charity Commission
Conversion from a company limited by guarantee should be fairly straightforward
The members and trustees are usually personally safeguarded from the financial liabilities the charity incurs, which is not normally the case for unincorporated charities
The charity has a legal personality of its own, enabling it to conduct business in its own name, rather than the name of the trustees.
Open to a wide range of grants, can fundraise and accept donations.

Cons

It is not as straightforward as running an unincorporated association or charitable trust
All CIOs have to register with the Charity Commission regardless of their income, even if they have an income of less than £5,000