Charitable companies limited by guarantee

A charity may also be registered as a limited company. Until the Charitable Incorporated Organisation (ICO) becomes available, the only form of company a charity can take is as a company limited by guarantee. A guarantee company is registered at Companies House and has many of the characteristics of the more comon trading company. The members of a company limited by guarantee have full limited liability, which is an important safeguard when future funding is uncertain. The members guarantee the company's debts up to a fixed amount. The guarantee is usually £1 per member. Guarantee companies do not have a share capital or shares but are controlled by their members who elect directors to run the company.

Introduction
Charitable trusts
Charitable companies
Charitable objects and the 'public benefit test'
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Introduction

The charity is the best-known form that a community company can take. A charity is set up to fulfil one or more charitable 'objects', set out in the charity's governing document. The objects of the charity must conform to the provisions set out in the Charities Acts, as must the manner in which the charity is run in general.

As charities are generally prohibited from trading (except as an incidental part of its main function) charities often set up a separate company for this: a charitable trading company. Charities are subject to a strict regime of regulation by the Charity Commission For England and Wales, the Office of the Scottish Regulator and the Charity Commission for Northern Ireland (unless their annual income is under £5000, in which case they are administered by HMRC).

An organisation can apply to the Commission to be registered as a charity and so receive a charity number. It can then hold itself out as a charity registered by the Commission and can take advantage of the various benefits and taxation advantages which legal charitable status confers.

Charities do not have to be companies; however, it is becoming increasingly common for them to be so. One point which is important to understand is the difference between unincorporated charitable associations and charitable companies, which are incorporated bodies conferring limited liability and having a separate legal personality from the people who run them.

Charitable Trusts

Charities have historically been run as unincorporated associations. A trust is the 'classic' form under which charities have operated for many years, and is a type of unincorporated association governed by a document called a trust deed. The people who run the charity and are responsible for its finances are called the trustees.

As the charity is not an incorporated body, and therefore is unable to own property in its own right, it is up to the trustees to hold any property 'on trust' for the charity. This means that the trustees have legal title to the property, but the 'real' (i.e. the 'equitable') owner is the charity. This poses a number of potential problems. For example, the trustees can become personally liable for any debts incurred in the course of the charity's business. It is also often much more difficult for the charity to transact business with third parties, as it cannot sign documents in its own name (as a company would be able to do via a signatory) and it does not have the legal title to any of the property or funds used in its day-to-day running. This means that most of the business needs to be done by, and in the name of, the charity's trustees rather than the charity itself.

Charitable Companies

The 'charitable company' (not to be confused with the 'charitable trading company') is a form under which charities can now be set up and to which existing charitable associations or trusts can convert. In either case, a company limited by guarantee is set up with special charitable articles, and is registered both at Companies House (as a company) and with the Charity Commission as a charity in its own right. Unlike an unincorporated association or trust, a charitable company, as an incorporated body, can own property, will be liable for its own debts, and can transact business with third parties (i.e. without the need for the trustees to do so on its behalf). As a limited company, the charity will have directors and members; the directors will also be trustees of the charity for the purposes of the Charities Act. The great advantage to those running the charity is that as a limited company, only the charity is liable for its debts and the people behind it are fully protected by limited liability. Charitable companies must make returns and submit accounts on an annual basis to both Companies House and the Charity Commission, and must also comply with both charity and company law.

Charitable objects and the 'public benefit test'

One of the most important parts of the constitution of any type of charity is its objects. As the name suggests, this is a list of aims and objectives, and includes (among other things) what the charity is setting out to do, who or what will be the beneficiaries of its work, and how the charity is to go about achieving what it wants to do. The objects of a charity must be set out in the articles of association (if the charity is a company) or in the trust deed (if it is a trust), and are essential to convincing the Charity Commission that the organisation will be worthwhile.

The objects of every charity must be 'charitable' as defined by law, and furthermore they must also fulfil the 'public benefit test' as set out in the Charities Act. For further information on this, please see our page on charity legislation.

Our services

We provide a full range of services from the incorporation of new charitable companies to drafting articles, appointing or removing trustees and helping charities comply with ongoing Companies House requirements. We can also help existing charitable trusts convert to incorporated status. For more details, please do not hesitate to contact us.

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The Charity Commission
Companies House

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