Should your charity seek incorporation?

We have seen an increase in the number of unincorporated charities (such as trusts) who are exploring the option of becoming a Scottish Charitable Incorporated Organisation (SCIO). This legal structure was introduced in Scotland in 2011 and has become a popular legal structure for charities.

Separate legal personality

A SCIO has separate legal personality, unlike an unincorporated charitable organisation or a trust. It can enter into contracts in its own name, such as transactions involving land and buildings. The charity could buy or lease a property in its own name, without that property having to be held in the names of its trustees.

Liability is limited: charity trustees (in the vast majority of cases) and members will not be held liable for any debts incurred by the charity. Charity trustees and members are therefore afforded a level of protection in the event that the charity is wound up.

Structure and governance

Incorporation leads to a formal corporate structure which provides for clear governance and accountability for members and those running the organisation. This does not mean that the organisation will lose its voluntary-driven nature and become subject to a number of burdensome obligations. Incorporation can actually help some organisations to ensure effective administration.

SCIOs are solely regulated by the Scottish Charity Regulator (OSCR), like unincorporated charitable organisations and trusts. SCIOs are also designed to be flexible and to accommodate structures which are either ‘one-tier’ where the members of the SCIO are also the charity trustees (the board members) or two-tier, with separate charity trustees and members.

The process by which an existing charity becomes a SCIO is:

1. Apply to OSCR for incorporation as a SCIO;
2. Apply to OSCR for consent to wind up the existing charity;
3. Transfer existing charity’s assets, liabilities and undertaking to newly incorporated SCIO; and
4. Wind up existing charity and notify OSCR.

Charities also have the option to incorporate as a company limited by guarantee (CLG). A CLG has no shareholders and does not distribute profit. Its members’ liabilities are limited to a guaranteed sum – usually a nominal £1.

In many ways SCIOs and CLGs seem comparable. However, there are important legal differences:

• SCIO members have some of the legal duties of charity trustees (there are no specific legal duties for company members);
• the SCIO has the advantage of being regulated solely by OSCR, as opposed to CLGs which are regulated by both OSCR and Companies House;
• SCIOs can only amalgamate with other SCIOs (not other legal types of charity);
• there are SCIO specific rules on: names; matters to be addressed in the constitution; public disclosures in communications, documents and on premises; statutory registers, their contents and public access to them; amalgamations and transfer of undertakings; and dissolution; and
• conflicts of interest must be addressed, at least in outline, in a SCIO’s own constitution (CLGs are subject to Companies Act 2006 rules on conflicts, plus any additional supplementary provisions in their articles of association).

Once the set-up elements are dealt with, the SCIO is likely to be the less time-consuming model to sustain, as it does not have to comply with company annual accounting requirements and management of its public record in addition to the OSCR regulatory regime.

Next steps

If an organisation remains unincorporated, those running the organisation face the potential risk of unlimited liability in certain circumstances for the organisation’s debt or commitments.  These risks would be reduced if the organisation converted to an incorporated structure which offers limited liability.

If your organisation is attracted by the benefits of incorporation, now is the time to act and consider conversion.