Converting to a charitable incorporated organisation - who can do it and how?

What is a charitable incorporated organisation?

Charitable incorporated organisations (CIOs) came into existence in 2013 (under the then new Charities Act 2011) as a legal form designed specifically for charities. A CIO offers its trustees the benefit of limited liability, but without the need to register as a company with Companies House.

A CIO can be established from scratch as a new charity by using one of the Charity Commission's model constitutions and applying directly to the Charity Commission. Alternatively, existing organisations may want to convert to CIOs from their current legal structure.

A CIO is governed by a constitution based on one of the Charity Commission's model constitutions.

Community Interest Companies (CICs) may decide to become CIOs (in order to benefit from charitable status) if it becomes evident that their purpose and activity is exclusively charitable or they want to take advantage of the benefits of charitable status. Charitable companies, which are already registered charities, may also decide to become CIOs using the statutory conversion process.

There are separate processes in charity law for the conversion of CICs and charitable companies - these are explained below.

Whilst not covered in this article, charities that are registered societies are also able to become a CIO, with specific requirements that are set out in the law.

What does it mean to convert

Upon conversion, the existing entity will be replaced by the CIO and will no longer exist in its original structure. The CIO will be regulated only by the Charity Commission and will be subject to charity law.

For CICs, conversion means gaining charitable status and the benefits that come with that (such as tax reliefs and funding opportunities).

For charitable companies, conversion means that they are no longer subject to regulation by Companies House and will have its registration as a company recorded as 'closed'. The CIO will continue to feature on the register of companies, but this is simply to comply with the law regulating business names which applies to CIOs (as well as companies). The organisation will keep its name and charity number.

Converting to a CIO is not the same as 'incorporation' which is a separate process that trusts and unincorporated associations can follow in order to gain protection from corporate identity and limited liability.

Why convert to a CIO?

For a CIC, the draw of converting to a CIO is likely to lie in the available benefits of charitable status and wide range of exemptions and reliefs from tax and gift aid on donations.

Charitable status can instill donor confidence and widen access to grants and funding streams.

For a charitable company, a key benefit to conversion is the reduced administrative and regulatory burden.

A charitable company must submit annual accounts to Companies House, file an annual confirmation statement and file certain resolutions and notices in relation to certain changes (for example on the appointment of a new trustee or upon changing the articles of association).

Changes to company law have introduced stricter controls and a wider range of regulatory powers for Companies House which has also increased the complexity of reporting requirements for charitable companies. Identity verification requirements for directors (trustees) impose a new legal duty on the trustees (as the company directors) and the charitable company to ensure that all directors and people with significant control have verified their identity. Non-compliance with the new requirements can lead to action against a company and its directors, and the striking off of a company.

From April 2028, accounts will be required to be submitted using specialist approved software (typically only used by accountants), and in due course, Companies House will only accept filings made by trustees or authorised persons, limiting the scope of delegation of filing and updates.

To accommodate the above changes, Companies House has increased many of its fees. There will be a further cost to purchase suitable accounts software or to instruct third parties to submit accounts which trustees of smaller charitable companies would ordinarily have undertaken themselves.

Some charitable companies will be able to manage these changes well, but for others the changes may inform a decision to convert to a CIO.

How to convert a charitable company to a CIO

The Charity Commission published updated guidance for the conversion of charitable companies to CIOs in 2024 (see that guidance here).

In summary, the main steps are as follows:

The constitution

The first consideration is to draft a CIO constitution based on one of the Charity Commission's models (for either a charity with a separate membership ("association" model") or a charity where the trustees are the members ("foundation" model)). Where the existing entity has a separate membership, you should make sure the members are properly consulted on the conversion process. They will ultimately be signing off on the change.

The constitution should reflect the provisions of the charitable company's articles of association. In particular, the purposes and dissolution provisions should not be altered, and the provisions regulating benefits to directors must not be widened. If the charitable company does want to make changes to those provisions, it will need to seek the consent of the Charity Commission to make those changes before embarking upon the conversion process.

If the company name contains 'limited' this should be removed from the name of the CIO.

The decision making

The members of the charitable company need to pass two resolutions:

1. A special resolution to convert to a CIO. The resolution will only pass if at least 75% of the members agree to the resolution (or all of the members if the resolution is in writing)

2. A resolution to adopt the CIO constitution (passed in accordance with the provisions of the articles)

Where the trustees of a charitable company are also the members, they will need to pass the resolutions in their capacity as members rather than trustees. Trustees should have regard to the trustee decision-making principles (here) and be confident that they are acting in the best interest of the charity, its objects and its beneficiaries.

The application to the Charity Commission

The Charity Commission has an online submission form for applications made by charitable companies to convert to CIOs. The application must include:

• The new draft CIO constitution

• A description of any changes made to the Charity Commission's model CIO constitution

• An explanation as to why the charitable company wants to convert to a CIO

• Signed trustee declaration forms for each of the trustees

• Copies of the member resolutions to convert and to adopt the constitution.

Following its review, if the Charity Commission is satisfied, it will seek agreement from Companies House that the company can be removed from the register of companies. The CIO will then be entered on to the Charity Commission register and marked on the register of companies as 'converted/closed'.

How to convert a CIC to a CIO

The Charity Commission published guidance in 2018 for CICs looking to convert to CIOs (see the guidance here).

In summary, the main steps are as follows:

The constitution

As with charitable companies, a CIC must prepare a CIO constitution. This will include the preparation of charitable objects which reflect the purposes of the organisation.

The decision making

The members of the CIC will need to pass the following resolutions:

1. A special resolution to convert to a CIO. The resolution will only pass if at least 75% of the members agree to the resolution (or all of the members if the resolution is in writing).

2. A resolution to adopt the CIO constitution.
   

The application to the Charity Commission

Unlike with a charitable company, a CIC must make a full application to the Charity Commission to register as a charity and the Charity Commission will need to be satisfied that the CIC does meet the legal criteria to be a charity. The key information required in the application form will be:

• The objects of the CIO

• A description of the CIO's activities

• A description of the public benefit from the CIO

• The details of all the trustees including trustee declaration forms

• A copy of the CIO constitution

• A copy of the members' resolutions.

If the Charity Commission is satisfied that the CIO can be registered and if Companies House agrees that it can be removed from the register of companies, the CIC will convert to a CIO and be registered with the Charity Commission.

Who can't convert?

An unincorporated charity that wants incorporated status cannot use the conversion process. It will have to register a new charity (whether a CIO or a charitable company) into which the charity's assets and liabilities will be transferred by way of a separate transfer process.

A charitable company with a complicated governance structure may not be able to convert if the Charity Commission model constitutions are not flexible enough for bespoke and complex governance provisions. A company that will want to enter into secured lending may decide not to convert because there is no official public record of charges over CIO property, which may deter potential lenders. Where a company has charges registered at Companies House, its lender may well refuse to consent to conversion.

An exempt charity (not required to be registered with the Charity Commission) cannot convert to a CIO.

If you would like more information about the conversion process please get in touch with our charity law and governance team who can advise and assist you.