Setting up a Charitable Company
These notes are not a definitive guide to the law. NICVA recommends that any voluntary organisation wishing to set up a company should take advice before finalising any documentation. Organisations which go through the process of incorporating as a limited company should also read our article on Running a Charitable Company for guidance on the legal administrative requirements for companies.
It is possible for a charitable organisation to become a company limited by guarantee. If a charitable company is being established, particular care should be taken in drafting the articles of association to ensure that they meet the requirements of charity law. The new company may be registered with the Charity Commission for Northern Ireland first before it is registered with Companies House or, alternatively, it may be incorporated first and then registered as a charity. Please also refer to our article on charitable status and see Pages 20-21 of the Commission's registration guidance.
A company has a ‘legal personality’ separate from the individual people who are involved in the company. This means a company can ‘own’ property in its own name, can enter into contracts, and can sue (and be sued) in its own name. This is convenient because normally there is no need for individual people (acting as ‘holding trustees’) to hold any property in their own names, or to enter into contracts, etc., on behalf of their organisation. Unincorporated organisations (i.e. any organisation that is not a company) must make arrangements for property to be held by individual people, who hold such property in their names on behalf of the unincorporated organisation.
A company is like a ‘person’ in the eyes of the law. That means that the directors of a company are not normally held personally liable if the company becomes insolvent. The company - legally ‘a person’ in its own right – is responsible for its own debts and liabilities. However, company directors must bear in mind that if they give ‘personal guarantees’ to a lender or in respect of any contract, then they would be held personally liable. The directors of a charitable company need not call themselves the board of directors and may continue to call themselves the management committee, or other relevant name.
A company may be perceived as more ‘professional’ than a simple unincorporated association. The corporate structure is well known in the business sector. Some funders may be more willing to give a grant to a company than to an unincorporated body.
The law governing companies is clearer and more detailed than that applying to unincorporated associations.
The members of the company are not normally legally responsible for its debts beyond the amount they have guaranteed, usually a nominal amount e.g. £1.
Members have rights and responsibilities and can elect directors. Directors have powers and responsibilities under the Companies Act 2006.
The cost of setting up a company is higher than the cost of setting up an unincorporated body.
For example, a fee is usually charged for drafting the memorandum and articles of association - the ‘governing document’ of a company.
There is a registration fee when registering the company at Companies House and producing the accounts in company format may also cost more.
There are ongoing costs of money and time in administration of the company once the company is up and running. For example, there is an annual fee for making annual returns to Companies House (i.e. details of the company’s directors, secretary and official address). Dissolving a company also involves time and expense.
The Companies Act 2006 is UK wide legislation that regulates companies in Northern Ireland (NI) which replaced the NI Orders 1986-1990. The need to comply with company law could be a burdensome responsibility on members of a voluntary management committee. Most voluntary organisations incorporate when they secure funding and are able to pay workers with the time and knowhow to ensure that company administration is dealt with efficiently.
Companies’ details are stored on the index of company names (the index) which is open to the public and the information is now provided for free, for example, you can download an organisation's latest annual accounts or details of the directors. This is really an advantage in most cases - it assists those voluntary organisations which believe in openness and accountability to the general public.
Audit or independent examination
All companies which are registered as charities are now bound by the new audit and reporting rules for charities which became effective on 1 January 2016. Charitable companies with an income of £500,000 or more must carry out a full audit or for those under this threshold they must carry out an independent examination. See article on Accounting for Charities for full details.
Company Limited by Guarantee
This is the most common type of company in the voluntary and community sector. The members’ liability is limited to the amount they have promised to contribute to the company’s assets if it is wound up – usually a nominal sum such as £1. One or more persons may form such a company by subscribing to the Memorandum of Association.
Company Limited by Shares
This type of company is common in the commercial sector but it is also used by some charities as the legal entity for their trading subsidiaries with the charity being a shareholder. The Companies Act 2006 now requires that there must be at least one natural person as a Director. Other types of company found in the commercial sector are the public limited company and private unlimited company.
Community Interest Company (CIC)
The Community Interest Company (CIC) was introduced in 2007 as a new corporate structure for non-charitable social economy enterprises that want to use their profits and assets for the public good. The CIC may be a company limited by guarantee, a private company limited by shares or a public limited company limited by shares and will have to register with Companies Registry with memorandum and articles of association and a community interest statement to confirm that the company will provide benefit to the community. It does this by describing its proposed activities, who the company will help and how. CICs are regulated by the UK wide CIC Regulator who can provide information and advice on setting up and running a CIC.
Charitable Incorporated Organisation (CIO)
A new legal structure specifically for charities was introduced by the Charities Act (NI) 2008 called the Charitable Incorporated Organisation (CIO) but it is still not available in Northern Ireland as yet. The CIO is similar in some ways to a company limited by guarantee offering protection of trustees from personal liability without the need for dual registration with the company and charity regulators. The CIO will be regulated by the Charity Commission for Northern Ireland. Secondary legislation is required to make it a viable option for charities and it is envisaged that it will not be available before 2017. In the meantime, charities may incorporate as a company limited by guarantee and then convert to a CIO when it is available.
The initial discussion as to the pros and cons of incorporating an organisation can be carried out well in advance of actually going about doing it. That will leave plenty of time for preparations to be made.
Paperwork can be drawn up in advance, but the date for incorporation and transfers should not be set until legal advice has been sought and it is clear that there are no adverse consequences to incorporation.
Set up new organisation
A new organisation (the company) will have to be set up. The first step is to draft suitable articles of association for the new company (NICVA can assist with this). If the organisation is to be a charity, then it may be registered with the Charity Commission before being registered with Companies House however if you need the company quite quickly then you may have to register the company first as it takes a considerably longer length of time for charity registration.
Transfer assets and legal obligations
The assets and legal obligations of the existing unincorporated association need to be transferred to the new company. Most constitutions contain a power to make payments to another organisation with the same or similar objects, and/or a procedure for dissolving the organisation and transferring any remaining assets to another similar organisation. If the unincorporated association is a charity, then the assets must not be transferred to the company until the company itself becomes a registered charity.
Follow existing constitution
Such procedures (in the constitution of the existing association) must be followed carefully. If an association does not have such procedures in its constitution, then all members of the association will have to agree to any transfer of assets.
Draw up formal deed of transfer
In all except the simplest situations, a formal deed will need to be drawn up, setting out the relationship between the old and the new bodies. This is likely to:
- Include information and assurances about the extent of assets and liabilities transferred (warranties)
- Give promises by the new organisation, for example to protect members of the old unincorporated body against later claims (indemnities)
- Authorise the new organisation to enforce obligations or collect monies due to the old organisation, generally by power of attorney
- Oblige each side to preserve and make available for inspection all key records or documents
- Provide for any steps that need to be taken after the transfer date, such as notification of various parties.
Transfer land or buildings
If the original body owns or occupies land or buildings, they must be transferred by a legal agreement. The transfer of a lease or tenancy agreement may require the consent of the freeholder or superior landlord (one above the landlord with whom the organisation has the lease or licence). All such transaction should be handled by a solicitor. Investments should also be formally transferred.
Transfer other property
Movable property such as equipment, furniture and vehicles can be transferred simply by giving them over. Note, however, that guarantees on equipment may be invalidated if the equipment is transferred to another owner.
Transfer of staff to a new organisation is covered by the Transfer of Undertakings (Protection of Employment) Regulations (TUPE). Regardless of the number of staff, their contracts, statutory rights and virtually all contractual rights are transferred automatically to the new company.
Employees should be notified of the identity of their new employer. There is no break in employment, so employment rights related to length of service are not affected.
As a result of the Occupational Pension Schemes (Employer Debt) Regulations 2005, employers wishing to withdraw from a multiemployer pension scheme must fund any remaining debt on what is called a “full buyout basis”. This essentially means that they must fund the amount it would cost to buy out the members’ benefits. This gives members greater protection should an employer stop participating in a pension scheme. Any change of structure, such as that which occurs when an organisation changes from an association to a company, or merges with another organisation, would trigger this debt. If your organisation is part of a multi-employer pension scheme (such as The Pensions Trust Growth Plan for example) you should contact a solicitor and your pension’s provider for advice.
Transfer equipment, contracts etc.
If the unincorporated body has equipment, leases, hire purchase agreements, service contracts, maintenance contracts or contracts to provide goods and services, then it must seek the consent of the parties it made the contracts with to be able to transfer them over to the new company.
This is called a ‘novation agreement’ and ideally contains a clause releasing the original signatories from their obligation for the contract. A solicitor is well placed to advise on all such issues.
Funding, grant-aid arrangements, service agreements, contracts and other funding arrangements which were given or promised to the original unincorporated association must be transferred to the new company. The funders should be made aware at an early stage of the plans to incorporate. Their consent may be vital. Indeed, it may be decided that incorporation would harm the organisation if funders were not prepared to deal with the new company.
Donors who give tax effectively should be informed of the identity of the new company.
Open new bank accounts
All bank and building society accounts will have to be in the full registered name of the new company, exactly as it is on the certificate of incorporation. Accounts may have to be closed and new ones opened up. This may not be necessary if the new company has exactly the same name as the old association. The bank will be able to advise further on its own particular procedures with this.
Insurances must be transferred to the new company, or the old policies cancelled and new ones taken out. It would be essential to take advice from the insurers on this issue.
Assets and debts
If debts outweigh the assets being transferred to the new company and the new company does not have adequate assets of its own to outweigh the debts, they cannot be transferred because this would mean that an insolvent company was being created.
Membership – there is no automatic transferral of membership. Members of the original organisation must reapply for membership of the new company and must be entered on the register of members of the company.
Stationery and written materials may need to be overhauled so that the correct information is on them (company law sets out regulations for the information that must appear on company stationery). Printed stickers with the new information may be used to achieve this, so long as they completely cover all references to the old name or old charity reference number. It is illegal to use stationery without the company number and details of the charitable status of the company.
Inform utility companies
Accounts for gas, electricity, credit cards, as well as accounts with contractors or suppliers, etc. have to be transferred to the new company even if the name of the new company is exactly the same as the old association.
Everybody who does business with the body, or who may have a claim against it, must know they are now dealing with a corporate body rather than an unincorporated association. If this is not done properly, it could lead to the limited liability of the company’s members being undermined.
Notify statutory bodies
Statutory bodies such as the Revenue (HMRC) need to be notified for PAYE and National Insurance purposes.
The memorandum of association (the memorandum) is signed by the subscribers, usually the first directors, who agree to become the first members of the company and the signatures witnessed. Both the memorandum and articles of association are then sent to Companies House with the forms listed below and the fee (currently £40). The original of the memorandum and articles is kept at Companies House so the organisation should keep its own copies and should keep photocopies of all documents and forms sent to Companies House. The memorandum, once filed with Companies House, cannot be amended but the articles, which contain the details of how the company is to be run, may be changed from time to time in accordance with the procedures set down in the articles.
The following company forms can all be downloaded from companies house:
Form IN01 - Application to register a company
This form includes a statement of compliance with the requirements for forming a company which must be signed by every subscriber to the memorandum (it is no longer necessary to get a solicitor’s swearing in form). It also names the company secretary and the first directors and gives the address of the registered office of the company. Some people may not be eligible to be a company director (e.g. on grounds of bankruptcy or some criminal offences). Directors of a company must be at least 16 years of age. From 30 June 2016, Part 5 of this form now includes a section about people with significant control (PSC) which must be completed, please see our guidance on PSC to determine if you have any PSC or not.
NB do NOT use the online application to register a private company limited by shares with model articles (form IN01). Download the form in the 2nd link which must be sent by post.
Form NE01 - Exemption from requirement as to use of ‘limited’ on name
This form must be completed and filed with Companies House if the company wants to avail of the exemption from having to use the word ‘limited’ in its name, as most voluntary organisations will be.
Form AA01 - Change of accounting reference date
This form sets out the date when the company’s reference period (financial year) will end, which may be submitted any time within the nine months after incorporation.
When the registrar of companies is satisfied that the company’s name is acceptable and that all paperwork is in order, a registration number is allocated and a certificate of incorporation issued (usually takes about two weeks from the time the forms are submitted). From the date on the certificate, the company comes into existence. A private company can start operating as soon as it is incorporated.
Transfer or discharge assets, liabilities and obligations
Before winding up the original association it must ensure that all its assets, liabilities and obligations are either transferred or discharged (ended). Even if both organisations have exactly the same objects, will carry on the same activities, and involve exactly the same people, the company is a new organisation, so everything must be legally transferred from the old association to the new company. If this is not done properly, problems could arise later about ownership of assets, liabilities and who is responsible for outstanding obligations.
Once the unincorporated body is ready to transfer the assets, liabilities and obligations, the new company should then pass an ordinary resolution to accept the transfer of the original organisation’s assets, and to take responsibility for the original organisation’s debts and its employees’ contracts of employment either at a meeting of the directors or at a general meeting of the company’s members.
Dissolve existing organisation
If all of the activities, assets and obligations have been transferred to the new company then it is usual for the original organisation (the unincorporated body) to be dissolved. This should be done in accordance with the dissolution clause in the constitution and a minute held of this meeting.
A company is required by law to adhere to certain administration requirements including establishing and maintaining registers of members, directors, secretaries and more recently the register of people with significant control (PSC). It is strongly recommended that you read NICVA’s Advice Note 5: Running a charitable company which outlines the various legal requirements for companies including details on stationery, proxy voting, registers and accounting requirements. It also includes the duties and potential personal liabilities faced by company directors.
For further information, please contact:
Tel: 0303 1234 500 (national call rate)
Companies House produces a range of guidance notes and online forms.
NICVA’s governance and charity advice staff can assist with drafting suitable memorandum and articles of association as well as offering specialised training on: Setting up a Company Limited by Guarantee and The Duties of the Directors of a Charitable Company.
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