Charitable Incorporated Organisation (CIO) status can offer UK charities numerous benefits. From limited liability for trustees to acquiring a separate legal identity or improving governance, there are lots of reasons why your charity may want to change its legal status.
But you need to be aware of the legal and insurance implications. As Charity Insurance experts, we’ve supported many nonprofit organisations through this transition. In this article, Commercial Manager Adam Taylor explores some of the benefits and challenges to help you get it right the first time.
CIOs: A definition
Before jumping straight into the benefits and hurdles, it’s worth taking a moment to define what a CIO is.
A CIO is a ‘Charitable Incorporated Organisation’. This refers to a legal structure designed specifically for nonprofit organisations in the United Kingdom. Introduced by the Charities Act 2011, a CIO combines the benefits of having a separate legal identity, like a company, with the simplicity of a traditional unincorporated charity.
Because a CIO is an incorporated organisation, it can enter into contracts, employ staff and hold property in its own name, rather than needing trustees to do so on its behalf. In addition, the trustees of a CIO benefit from limited liability, reducing their personal financial risks in the event that the charity faces debts or legal claims.
It’s worth mentioning that CIOs are exclusively regulated by the Charity Commission.
The Case for Transitioning to CIO Status
Arguably, the most important benefit of a CIO structure is its limited liability for trustees.
With CIO status, personal financial risk is significantly reduced because trustees are not personally liable for the debts or obligations of the charity. This protection can provide peace of mind and encourage competent people to take up trusteeship roles without fear of personal financial loss.
Not only that, but a CIO has its own legal identity, separate from its trustees and members. As a result, it can enter into contracts, employ staff and own property in its own name. This simplifies administration, making day-to-day transactions, such as renting a building or opening a bank account, more straightforward. This separate identity can also give potential donors and partners more confidence in the charity’s professionalism and longevity.
The CIO structure can also provide a solid foundation for growth, better decision-making and greater accountability. This may make the charity more attractive to grant-makers and other funders who often want evidence of good governance in the organisations they support.
CIOs are regulated solely by the Charity Commission, rather than being subject to both Companies House and Charity Commission regulation. This streamlined approach simplifies administrative processes, reduces duplication in reporting and decreases the risk of non-compliance. This can free up more time and resources to focus on the charity’s mission and activities.
Legal Implications of CIO Status
There are several legal factors to consider when moving over to a CIO status. For instance, the process can be long and complex, involving document preparation, registration, and potentially dissolving the existing organisation.
These activities may incur legal and professional fees, as well as administrative tasks, which may strain smaller charities’ budgets.
Plus, it may affect your brand reputation. If the change and the reasons behind it are not explained clearly to stakeholders, it could lead to confusion. In addition, you may need to reissue contracts and update working arrangements, which could create work for partners or result in the loss of relationships.
You should also consider your staff and volunteers. Their contracts, pension schemes and benefits may be affected, so you will need to think about how you communicate the changes, and whether you will need to provide reorientation for volunteers.
You will also need to consider transferring assets, particularly property, into the CIO’s name. This can be complex and may involve the Land Registry and third parties.
Plus there are tax implications. For instance, VAT and Corporation Tax, alongside increased reporting and regulatory requirements, which could increase administrative workload.
Insurance Implications of CIO Status
It’s not just the legal side of the charity that may see changes. You may need to consider the impact on your insurance too.
Put simply, you may need new insurance policies.
Your CIO will be a new legal entity, which needs its own insurance policies. This could create extra costs and changes in coverage. You must inform your broker or insurer of the change as soon as possible to ensure compliance with your policy terms and avoid the risk of coverage issues or cancellations.
The transition may also result in coverage gaps. It’s important to work with a broker or your insurer to ensure continuous coverage during the transition to avoid potential liabilities. Plus, your risk profile may change, which could affect what insurance you need, coverage limits or premiums.
Despite the limited liability offered to trustees by CIO status, it’s still important to keep the right level of insurance cover, such as Employers’ Liability and Public Liability. You’ll also need to make sure asset and Property Insurance is in the charity’s name.
Discuss your CIO insurance needs today
Becoming a CIO can offer plenty of benefits to charities. However, it is crucial to carefully consider the legal and insurance implications. Charity organisers should talk to legal and insurance professionals to ensure a smooth transition and to make sure that they have the right protection for the organisation, its trustees, staff and volunteers.
If you’re moving from an unincorporated charity structure to a CIO, get in touch today. Our team of Charity Insurance specialists are on hand to help and advise on the insurance your organisation needs.