A charitable company is normally registered for non-profit making purposes. 

Which organisations use this type of structure?

It may be appropriate to establish a charitable company where some or all of the following apply:

• the organisation is to be quite large;
• it will have employees;
• it will deliver charitable services under contractual agreements;
• it will regularly enter into commercial contracts; and
• it will be a substantial owner of freehold or leasehold land or other property

There are two types of Charitable Company:

• A company limited by shares;
• A company limited by guarantee.

Company limited by shares:

Shareholder liability is limited to the amount unpaid on shares they hold. This type of company is not generally appropriate for the charitable sector.

Even though some charities are set-up in this manner investors are limited to how much profit can be gained from shares & owning a substantial amount of shares.

Company Limited by Guarantee

A charitable company limited by guarantee has members, rather than shareholders, the members of the company guarantee, (undertake), to contribute a predetermined sum specified within the governing document, ,usually between £1 & £10, to the liabilities of the company which becomes due in the event of the charitable company being wound up. It cannot distribute its profits to its members, and is therefore eligible to apply for charitable status if necessary. Charitable companies are useful for non-profit organisations that require corporate status. This means that its profits are not distributed to its members but are retained to be used for the purposes of the charitable company.

Most charitable companies that are set-up use the limited by guarantee model from the Charity Commission.

Advantages:

Flexible structure that can be adapted for any size and type of voluntary organisation.

As an incorporated organisation, it has a separate legal identity.

This means it can:

• Buy and sell property in its own name
• Take or defend legal proceedings in its own name
• The company can borrow money & the lender is aware that the organisation, not a changing group of individuals, is responsible for repayment;
• Property transfer is made more straight forward

- Corporate status protects members with limited liability.

• Member liability limited to the amount they agreed to in governing document, (e.g. £1)

Directors can obtain Personal Liability Insurance

Democratic management structure - membership has power to elect, and remove the Directors

Detailed memorandum and articles, which covers many of the problematic situations which charitable companies, can get itself into.

Property ownership remains in the name of the company, so there is not need for documents transferring ownership which might be the case if joint trustees were holding the property as could be the case for an unincorporated association.

Registration with the Registrar of Companies takes only weeks provided there are no complications, following agreement of the Governing Document - this is best agreed with the Charity Commission beforehand.

Disadvantages:

• Costs involved in the initial setup
• Regulated by the Charity Commission & Companies House & must submit annual returns to the Registrar of Companies and the Charity Commission
• Will be fined or removed from the register for not complying with  Companies House obligations, subsequently the Charity Commission
• If the Charity Commission's model is to be amended, then legal fees for setting up the charitable company may be considerable.

The Governing Document:

The governing documents of a charitable company consists of two parts:

• The memorandum of association - contains the aims of the organisation, the powers it has to pursue the aims and the extent of member's liabilities;
  
• The articles of association - describe the company's rules, including its procedures for electing the management committee and keeping accounts.

The Charity Commission has also produced a model memorandum & articles of association for a charitable company limited by guarantee, model forms (GD1).

Click to assess
Model Governing Documents

How is a memorandum and articles of association put into operation?

It is put into operation by being subscribed to by one or more people in accordance with the provisions of Part I of the Companies Act 1985 and by registration with the Registrar of Companies at Companies House who will issue a certificate of incorporation.

There is a fee for registering companies. Contact Companies House at Cardiff CF14 3UZ, telephone 0870 333 3636 or on their website at:

www.companieshouse.gov.uk

What documents are needed for registration with the Charity

Commission?

In addition to the application form (APP 1) and the declaration form (DEC 1), both of which are included in the Application to Register a Charity pack from available form the Charity Commission website. 

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Registration Application Pack

The following must be provided:

• two certified copies of the memorandum and articles of association;
• a certified copy of the certificate of incorporation; and
• certified copies of any special resolutions showing subsequent amendments.

To certify a document, a person authorised by the trustees should write on the copy: "I certify this to be a true copy of the original" and then sign and date it. The minimum requirements for charitable company registration  can be any one of the following:

• Annual income of £5,000 or more
• Permanent endowment
• The use or occupation of any land including buildings

Charity Law

An organisation is legally required to register with the Charity Commission if it's aims are charitable & has an annual income of over  a £5,000.

Charity Commission Requirements

 Small charity income & expenditure up  £5,000

• A small charity, which is voluntarily registered with the Commission, will follow the requirements for light touch regulation,
• Submit annual simplified  accounts on a receipts & payments, or accruals basis 
• Submit a Annual Report
• Ask permission or notify them of any changes to the governing document

Charity  with income / expenditure between £10,000 - £100,000 will also have to:

• Have their accounts externally scrutinised (independent examinar).
• Complete an Annual Return for the Commission
• Submit a Annual Report

Charity  with income / expenditure between £100,000 - £250,000 will also have to:

• Prepare accounts in accordance with the regulations and the SORP
• Have their accounts externally scrutinised (independent examinar).
• Complete an Annual Return for the Commission
• Submit a Annual Report

Charity  with income / expenditure between £250,000 - £500,000 will also have to:

• Prepare accounts in accordance with the regulations and the SORP
• Have their accounts externally scrutinised (independent examinar) by a accountancy body specified under the 2006 Act.
• Complete an Annual Return for the Commission
• Submit a Annual Report

Charity  with income / expenditure exceeding £500,000 or who's gross asset exceed £2.8m & a gross income of £100,000 will also have to:

• Prepare accounts in accordance with the regulations and the SORP
• Have their accounts externally scrutinised (independent examinar)by a accountancy body specified under the 2006 Act.
• Complete an Annual Return for the Commission
• Submit a Full Annual Report