Charities | Changing legal structure

The increasing variety of corporate legal structures for charities and social enterprises means many organisations are considering changing their structure. The scope for conversion has expanded recently with the advent of the Community Interest Company (CIC) and the Charitable Incorporated Organisation (CIO).

Charitable companies converting to CICs must comply with the procedures in the Companies (Audit, Investigations and Community Enterprise) Act 2004. Crucially, they must obtain the prior written consent of the Charity Commission (section 39 of the 2004 Act as amended). In the absence of this any conversion may be quashed. We will give consent if the charitable company's property will be adequately protected following conversion and there are no regulatory concerns about the charity. We may, however, refuse a request if we identify that charitable funds may be at risk. Consent for any regulated alterations necessary during the conversion process may also be provided (section 198 '¨of the Charities Act 2011).

When charities convert to a CIC they lose their charitable status and consequent fiscal advantages. The company ceases to be a charity and is removed from the register of charities. Section 39(3) of the 2004 Act makes clear that there is an asset-lock on the charitable property so that it still has to be applied for charitable purposes

CICs can convert to charitable companies if they comply with strict conversion procedures in the 2004 Act, including the statutory requirement to obtain a "statutory statement" from us, confirming that if it does convert it will be a charity which is not exempt from the requirement to register (section 54 of the 2004 Act). In deciding whether to issue the statement we will consider whether the CIC is established for exclusively charitable purposes for the public benefit.

The principal feature of a CIC is the asset-lock which is designed to ensure that assets are used to benefit the community for which it was established. Transfers are permitted to asset-locked bodies which include charities, CICs, a permitted industrial and provident society, or an equivalent organisation set up outside '¨the UK.

The new charitable company is subject to charity law and must be registered as a charity if it meets the minimum income requirements and standards.

The legislative framework does not allow industrial and provident societies (IPS) to convert to CICs, so a two stage process is necessary. The IPS converts to a company (section 52 IPSA 1965) and then to a CIC (section 26 (2) of the 2004 Act), subject to the approval of the FCA.

Conversely, a CIC can convert to a "permitted IPS", meaning one which has a restriction on the use of its assets (section 26 of the 2004 Act).

In all three options, the conversion from one corporate form to another has the benefit of not interrupting the business as the legal personality is unaffected.

Unincorporated charities can't convert to CICs. Rather than engage in a two stage process, the trustees may establish a CIC and appoint the CIC as trustee of the unincorporated charity (subject to any restrictions in the governing document). There should be no transfer of property to the CIC which would be a non-charitable application of funds unless there are in place safeguards to ensure the funds can only be applied in furtherance of the charitable purposes of the unincorporated charity.

The Charities Act 2011 contains provisions enabling certain bodies to convert to a CIO (sections 228-234). These set out how the process will operate once the necessary regulations are passed. While the Office for Civil Society is expected to be consulting on the regulations soon, they are unlikely to be in place until 2014. In the meantime, existing charitable companies, charitable industrial and provident societies (IPS) and CICs cannot convert to CIOs.

IPSs are not be able to convert to be CIOs unless they cease to be exempt charities as envisaged by the Charities Act 2006 (now consolidated in the 2011 Act).

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