Before you start

Published: 24/05/2017
Updated: 24/05/2017

Summary

Incorporation is a significant decision for any charity; there are important actions the charity will need to take. You are creating a new legal entity and will need to transfer all assets and liabilities of the old charity to the new charity.

It is important that charity trustees and members understand the full implications of the decision, plan ahead and acknowledge that it will take time for the process to be completed.

 

Charity trustees have a legal duty to comply with the requirements of charity law, the requirements of their own governing document and to act with care and diligence when making decisions. 

If setting up a company you also need to comply with company law. 

 

Here are the key questions that all charities looking to incorporate should ask: 

1. Why do you want to become an incorporated charity?

Many unincorporated charities may decide to change to a SCIO or company to secure funding streams or because they employ staff or own property. Incorporation means that the charity as a legal entity can enter into contracts in its own right and the charity trustees do not have the same liability if something goes wrong.

It also means that you’re setting up a new organisation that will need to have a different name, charity number, and governing document and must comply with other legal requirements associated with being a SCIO or a company.

2. Do you want to be a company or a SCIO?

Our legal forms factsheet sets out the key characteristics and differences between companies and SCIOs. Members of a SCIO (unlike members of an unincorporated association) are subject to some of the general duties of charity trustees; specifically, they must:

  • act in the interests of the SCIO, and
  • seek, in good faith, to ensure the SCIO acts in a manner which is consistent with its charitable purposes.

See our SCIOs Guide for more information.

Charitable companies in Scotland are regulated by OSCR and by Companies House and must comply with company and charity law.

3. Does your existing governing document contain the power to wind up the old charity and transfer the assets to the new charity? 

If you don’t currently have the power to wind up the old charity or transfer the assets you may need to change your governing document before you can start the process. See FAQs for more information.

4. What does your existing governing document say about making this kind of change?

  • Do you need to consult with and get agreement from the members?
  • Are there timescales and procedures for consulting with members?
  • What are the voting requirements?

5. Which other regulatory organisations do you need to contact?

You might need to contact one or more of these organisations: 

  • Funding organisations
  • Local authority
  • HMRC
  • Disclosure Scotland
  • Information Commissioner’s Office (ICO) - UK
  • Other Regulators like the Care Inspectorate (see FAQs for more information).

As you are creating a new legal entity you may need to re-register with them and there may be costs involved. This is a specific issue for bodies registered with the Care Inspectorate. An application to cancel the Care Inspectorate registration for the old charity must be made and in some cases this can be refused – so contact the Care Inspectorate as soon as possible. See the Care Inspectorate Factsheet for more information.

6. Will you need a new bank account? 

Speak to your bank. You will need to set up a new bank account once the new charity so it is ready to receive the cash balances from the old charity. You should do this once the new charity is registered. 

It may be that you need to run both bank accounts for a short time until the assets are all transferred across. Many banks have accounts suited to specific legal forms; make sure you have the correct one set up. 

7. Will you need to set up new agreements with your funders? 

Speak to your funders and find out what they require. You may need their consent if you are transferring grants (or assets bought using grant funding) to a new charity and they may require you to sign/update a new funding agreement.

8. Will you need a new insurance policy? 

If you have insurance you should contact your insurers and find out what they require. Remember you are establishing a new charity; it may be that new insurance certificates are required.

9. Do you employ staff? 

If yes then you should consider your legal responsibilities under The Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE regulations), plus any change to PAYE and national insurance. 

10. Do you operate a pension scheme? 

There will be issues here you must consider. Dissolution of the old charity may mean that a large cessation debt (as the old charity will be ceasing membership of the pension scheme) becomes immediately payable which could be a major financial problem – this is often called the crystallisation of the pension fund. Where a body is a member of a multi employer scheme there may also be significant implications. Professional advice will be needed. See the Pension fund considerations Factsheet for more information.

11. Are you registered for VAT or Gift Aid?  

Seek professional advice on tax matters. You may need to obtain a new VAT registration for new charity. You should do this once the new charity is registered. 

Your VAT advisers should also be asked if there are other VAT implications from the transferring operations to the new charity. If you operate gift aid you will need to register the new charity for gift aid and cancel your previous registration – HMRC will be able to assist with this. See FAQs for more information.

12. Does your charity get legacy donations,for example being left money in Wills?  

If so, see FAQs for more information. 

13. Do you have any of the following? 

  • Leases?
  • Contractual agreements – do claw back provisions apply?
  • Property?
  • Other people holding property on the charity’s behalf?
  • Pensions?
  • Intellectual property – software licences, websites, trademarks?
  • Endowments?
  • Liabilities?
  • Investments?
  • Claims pending – insurance claims or claims against contractors? 

You will need professional advice on how to transfer these to the new charity. Leases of equipment may not be transferable and there may be penalties for early termination.

Make a list of all the organisations you need to contact and all the things you need to transfer over to the new charity. 

 

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