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Introduction
The question of whether a charity should be incorporated
is likely to depend upon the proposed scale and complexity
of its operations. However, where the charity's activities
involve employing people, owning or leasing property or entering
into other contractual liabilities, the advantages of incorporation
could be significant.
Advantages
• Limited Liability
The sort of company generally used for "non-profit making"
activity is a company limited by guarantee (as opposed to
a company limited by shares). The Memorandum of Association
of such a company will contain a provision limiting the liability
of members to a guarantee from each of them of (usually) £1
towards the liabilities of the company when it is wound up.
By way of contrast, the trustees or committee members of an
unincorporated body (at least those who contract with a third
party, and possibly the others) risk personal liability without
limit for the debts of that body, and an indemnity from that
body may be inadequate protection.
The directors of a company are generally not personally liable
for that company's debts. There are exceptions, for instance
where directors have given a personal guarantee to a landlord
or bank, or when a company becomes insolvent and a liquidator
sustains a claim for fraudulent or wrongful trading under
the Insolvency Act 1986. There are also many criminal and
civil offences under general law which apply to all businesses.
You may find Charles Russell's booklet on Directors' Responsibilities
helpful on this subject. Please contact us if you would like
a copy.
The directors of an incorporated charity will, however, be
individually liable (just as they would be as trustees of
an unincorporated charity) for any misapplication of charitable
funds. The firm's booklet on Charity Trustees' Responsibilities
provides further details. Again, please contact us if you
would like a copy.
• Legal Entity
Incorporation involves the establishment of the organisation
as a separate entity for legal purposes. A company continues
indefinitely and has a legal life of its own, entirely separate
from the personal and business life of its members and directors.
This means that it can contract in its own name and commence
or defend legal proceedings in its own name. The main benefit
is again to give more protection to the individuals involved
than can be the case within an unincorporated body, but a
company also tends to have greater credibility with those
with whom it does business. At the very least, a company is
an entity with which people are accustomed to doing business.
Disadvantages
There are some disadvantages of incorporation but they are
not as significant as the advantages;
• Companies have to file returns and accounts with Companies
House. However most charities nowadays have to do the same
with the Charity Commission. Both registers are open to public
inspection.
• The trustees have the duties of directors as well
as those of trustees and must comply with company law as well
as charity law.
• As regards costs, incorporation tends to be a little
more expensive than the creation of an unincorporated charity
but running costs thereafter should not be radically different.
Unless there is a low level of turnover, audited accounts
/europa.eu.int/comm/competition/antitrust/others/esc_future_paper.pdf" target="_blank">click
here.
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