Why you should incorporate your charity
We get lots of enquiries from business owners and directors asking for professional advice and assistance with companies from every sector imaginable.
One new thing we’re going to do in 2021 is to use some of these inquiries as examples and answer them publicly as well as we can.
Not only will it help demystify the sometimes opaque world of business and insolvency advice but it could also give you some food for thought if your business is going through something similar.
This week’s question: “Should we incorporate your charity?”
Giving time to a charity is one of the most rewarding things somebody can do.
It can be on a personal level of lending a hand in the front office and working closely with whichever groups they work with to help make their lives better.
Or it can be using your professional talents, connections and skills and taking a management or board role with the charity to help guide it on a strategic level to meet its goals and exceed them.
One way that executive experience can be valuable is when deciding what structure a charity should take – incorporated or unincorporated.
There are significant differences between the two and can have real consequences for trustees if and when the charity eventually closes depending on this.
Incorporation gives a charity a legal status similar to a company. Amongst other things it allows the charity to own property outright and gives staff authority to sign contracts in the charity’s name.
An incorporated charity has tighter legal control and regulations to make sure that it is being run legally and correctly.
Part of this includes arranging annual independent examination of the charity’s accounts if the annual income is over £25,000 and submitting an annual report and accounts to the Charity Commission where it will be published online to ensure greater transparency and accountability.
Incorporation also gives trustees legal protection from being held personally liable for any charity debts.
This is an important point – if a charity is not incorporated then trustees can and will be held personally liable for any debts should the charity eventually become insolvent.
Unincorporation is generally chosen by smaller charities that don’t rent premises, employ staff or own property or equipment.
The charity has no legal identity or personality of its own so as mentioned earlier, any contracts that have to be signed by trustees would make them personally liable for any debts incurred.
This might not be an issue depending on the charity and its purpose but every trustee should be aware of the possible implications at this early stage.
Chris Horner, Insolvency Director with Business Rescue Expert said: “One of the things charities and their trustees need to get right at the very beginning is their legal status.
“It might seem like unnecessary bureaucracy but it can save a lot of expensive and difficult decisions further down the road.
“Trustees can have the best intentions when they take up a role with a charity but they also owe it to themselves to find out everything they can in advance. Having a limited by guarantee company behind a charity in case anything goes wrong is one example where a little essential work in advance can prove critical.
“In short, a charity held by a limited company can be placed into liquidation if it finds itself in a position where it cannot pay its debts. If there is no company behind it the trustees are likely to find themselves personally liable if something goes wrong”
Nobody quite knows what a post-Covid UK society will look like.
Certain sectors and areas will bounce back quickly and be stronger and more resilient than before.
Others will eventually recover but some might be critically weakened and not able to continue either at their previous levels or in some cases, at all.
We offer a free initial consultation for anyone with an ownership interest in a business or even within a charitable organisation to discuss what unique issues they face.
Our experienced and knowledgeable advisors will work with them to understand the facts then look at a roadmap to recovery outlining the sensible, measured steps to take to get back on the path to success.
It doesn’t matter if you’re running a charity, small, medium or large business, working exclusively with volunteers or employ a hundred people – we’re there to help when you need it.