CHARITIES v CIC v COMPANY LIMITED BY GUARANTEE

Question

In recent times I have had cause to engage with my PC about various charities which run local services.  The common criticism is that the foundation model is used and as such there is no chance of any public input. This means trustees are often appointed and  not elected as there are no members.  As such there often exists a  very cosy and exclusive financial  relationship between the Charity and the PC via the grants system. Given recent issues some Councillors are warming to greater Community Involvement and have dare I say it mentioned changes to governance in the same sentence as members and electing trustees.

However, the main charity has come back and says it wants to become a Company Limited by Guarantee, citing trustees personal liability as the reason. Now I don’t know a lot about these entities but it seems to be ceasing Charity status and becoming a private company with directors. I am not sure if they have a constitution in the same way as a charity.

My main issue is that a precept payer I seek some route through which I can comment on how my money is spent. Currently through the Chrity system at least I can comment on the trustees compliance to the constitution (via The Charity Commission) .

Does anyone have experience of their previous charities becoming CICs or companies limited by guarantee and what are the perceived advantages and disadvantages to precept payers. Also would such a change involve the charity being dissolved ?

We have had one recent bad experience when a CIC was set up for the Covid response and that has imploded because of personality clashes between certain Directors/Councillors and local volunteers

Answer 1

Charity Limited by Guarantee is an old-fashioned and long-winded approach to reducing Trustee liability. This has been replaced by CIO (Charitable Incorporated Organisation), which has all the benefits of Ltd by Guarantee, but without the dual reporting requirement (Charity Commission and Companies House).

Limited by guarantee is still a charity and isn't a private company and Director is just another word for Trustee.

Very few charities have publically-elected Trustees. Membership organisations are the exception, but this is not the standard route for a small local charity. Have a look at the Charity Commission guidance on setting up new charities for further details.

All charities, regardless of status, must have a governing document that sets out their aims and objectives and their rules.

If the legal structure is changed, the existing charity is dissolved and replaced with a new one, through a formal legal process.

Sorry for the brevity. Got to take the dogs out!

Comments

Know what you mean Dave, just returned from my twice daily obligatory walking the dog. Thanks for your summary.  The problem I have with the Foundation Model is that “arrangements/understandings” can be formed between the Charity and the PC about financial matters and this can mean that normal VFM decisions do not necessarily have to be made. This means that sometimes the charity can be fairly blasé about say fund raising as it is safe in knowledge that any operational shortfall will be made good. This can be a great arrangement for the two parties involved but does not necessarily give good value for the precept payer. The trustees are generally appointed by the PC and there is often “we are all part of the same club” mentality. Its all too cosy for my liking as an ex auditor and project manager. I have on several occasions suggested fund raising channels to them and in essence the reply has been “but we don’t need to”.  I guess this all part of the agreed PC government backed way of operating i.e. you can set your own budget so you don’t have to worry how much things cost. Interesting to note that the old Charity needs to be dissolved as that does involve a public process which gives an opportunity for issues to be aired.

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Are you sure you are right Dave, The Gov Web site includes four choices for Charity structure including
charitable incorporated organisation (CIO)
charitable company (limited by guarantee)
unincorporated association
trust

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Quite right.  I wasn't saying that Ltd by G'tee or CIO are the only options, merely that Ltd by G'tee is rarely used as CIO is the new kid on the block, offering the same benefits, but much easier to operate. I'm gradually migrating my unincorporated village halls and community centres to CIO, as the only protection for Trustees of an unincorporated association is insurance, and we all know about the small print in insurance policies!

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Any local council thinking of setting up a charity should ask two important questions. Firstly, is the purpose of the proposed charity to perform a function that falls outside the permitted powers of the council? (Grants to individuals would be the obvious example). Secondly, is the purpose so valued by the community that it will attract thousands of pounds of individual donations each year? If the answer to these questions is no, don't set up the charity. The project could be run from within the council. We already have one charity for every 350 people in England and Wales (or one for every 150 households). Do we need any more?

Funding relationships between local councils and their charities are still subject to public scrutiny through the local government transparency processes and, unless GPoC is held, subject to the S137 limit. Councillors who serve as Trustees of these charities tread a fine line as far as their conduct is concerned.

I haven't mentioned CICs. It's not my area of expertise, but, in essence, a CIC must be a limited company and can't be a charity, although a charity may set up a CIC as a trading subsidiary. A CIC can pay directors and shareholders, carry out permanent trading activities, retain profits (but pay Corporation Tax on them), can have just one director, not entitled to rate relief, report to Companies House, not Charity Commission.

Finally, reconstituting an existing charity with a new legal structure doesn't involve a public process if the objects are to remain the same.

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When I say a public process I mean if a charitable trust is to change its legal structure the formal dissolution has to be agreed by residents in our  case. That's in the constitution

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I agree absolutely that the decision to set up charities should be based on the finances. If a charity is to survive on grants the problem is that the Charity then has no incentive to fund raise and simply does the day job and  sends the shortfall bill to the precept . If a charity is set up  with members this puts the decision to agree financing in the hands of the residents/end users. You pays your money...