Established by the Charities Act 2006, the CIO was introduced as a new legal body designed specifically for charities. The need for the CIO came as a result of concern over the current legal problem faced by charitable companies which are subject to regulation under both charity and company law. It is claimed that the CIO will provide a much simpler regulatory regime for a charity whilst offering the trustees the benefits of limited liability.
With so many apparent advantages, the important question those operating in the charity sector should be asking is…..Is it for you?
If your charity is carrying out commercial activities i.e. entering into commercial contracts, employing staff etc, then a CIO might be for you. If you are currently carrying out these activities as a Trustee of an unincorporated charity, then you are facing personal risks in doing so. Whilst it may be possible to take out trustee indemnity insurance, the cost of doing so may be prohibitive and the policy might not necessarily cover the risk in question. Operating as a CIO will enable you to carry out these activities without the risk of incurring personal liability providing that you are not acting in breach of your duties.
Whilst these benefits are also offered by a company limited by guarantee (which is currently the only option available to trustees if they wish to limit their liability), the current price to “pay” for such protection is the dual regulation. What does this mean? Essentially it means that not only is there a dual administrative burden in having to submit two sets of accounts, annual returns, filings etc but also that the directors/trustees must comply with two separate legislative frameworks which unfortunately do not work in harmony together. This can lead to confusion and even generate potential conflicts for the trustee directors.
The CIO is being introduced to remove these problems by creating one comprehensive legislative framework but the CIO will not be suitable for every charity. If you are currently a smaller unincorporated charity then you might not welcome the increased regulation which the CIO, as a corporate structure, would bring i.e. keeping registers of charity trustees and making them available for public inspection, submitting accounts to the Charity Commission irrespective of the level of income generated and Trustees possibly facing criminal sanctions for a failure to comply with the relevant legislation.
If you consider that the potential risks that you face are minimal because of the nature of the organisation that you are involved with, then you may take the decision that the CIO is not for you.
Likewise larger "corporate" charities which require commercial funding may be hesitant to convert into a CIO until the banking sector have had the opportunity to consider the new structure. Interestingly, one of the delays in introducing the CIO is due to concerns over establishing and regulating the register of charges which is currently carried out by the Registrar of Companies.
If you do decide that the CIO is for you, then hopefully the process of conversion will be relatively straightforward although it looks like you may have to wait for some time before you can do so. There has been a substantial delay in introducing the accompanying regulations and model constitution and the latest news is that the earliest that we may expect the CIO to be introduced is April 2010.
We will of course keep you updated as and when there are any further developments and in the meantime if you wish to discuss this or any aspect of operating as a charity (both unincorporated or incorporated) then please do not hesitate to contact Paula Smith or any other member of the DWF Charity Group.