Incorporating your charity can provide several benefits to both charity trustees and stakeholders, but before jumping into the process, it is important to consider how incorporation may affect all aspects of your charity. Connor Barnes explains why.
What is an unincorporated charity?
In Scots law, there are currently two types of unincorporated legal vehicles which charities may use – a trust or an unincorporated association.
Under both legal structures the charity is considered to have no legal personality and acts through its individual charity trustees. Therefore, the charity trustees (and in the case of unincorporated associations, the members too) may have joint and several personal liability for the debts and liabilities of the charity. In addition, charity trustees enter into contracts and own assets in their own names and may be sued on matters relating to the charity.
Why incorporate?
The most common reasons for charities seeking to incorporate relate to the risks of managing and administering the charity. These include:
- Potentially unlimited personal liability.
- Administrative difficulties arising from the need to:
- Transfer ownership of charity assets when charity trustees change.
- Execute documents, own land, and enter into contracts and other obligations in the individual names of the charity trustees.
- In the case of trusts, narrating trustee changes through a legal deed.
Incorporating your charity as either a either a Scottish Charitable Incorporated
Organisation (SCIO) or a company limited by guarantee can provide your charity with a more robust legal structure, limited liability for trustees, and greater credibility.
Provided below are our top five tips to consider when navigating the process of incorporation:
1. Assess the benefits and implications
Before making the decision to convert, it’s crucial to understand the benefits and implications of changing your charity’s legal structure. Consideration should be given to the following:
- Limited liability: Both SCIOs and companies limited by guarantee offer limited liability for trustees, protecting their personal assets, provided that they act in accordance with the law.
- Separate legal personality: This allows the charity to enter into contracts, own property, and take legal action in its own name rather than the personal names of the charity trustees.
- Regulatory requirements: SCIOs are regulated solely by the Office of the Scottish Charity Regulator (OSCR), while companies limited by guarantee must comply with both charity law and company law, including filing requirements with Companies House.
- Governance and management: Consider how the new structure will impact your charity’s governance, management, and operational procedures.
- Funding: Would incorporation provide access to funding, finance, or partnerships that would otherwise be unavailable?
2. Engage with stakeholders
Converting your charity’s legal structure is a significant change that may affect various stakeholders, including trustees, members, staff, volunteers, and beneficiaries. It’s essential to engage with them throughout the process:
- Consult trustees and members: Hold meetings to discuss the proposed incorporation, address any concerns, and obtain their approval.
- Communicate with staff and volunteers: Ensure they understand the reasons for incorporation and if it will impact their roles and responsibilities.
- Inform beneficiaries and supporters: Keep them informed about the changes and reassure them that the charity’s mission and activities will remain unchanged.
3. Prepare the necessary documentation
Incorporating as a SCIO or a company limited by guarantee requires careful preparation of the necessary documentation. This includes:
- Governing document: Draft a new SCIO constitution or articles of association for a company. These documents outline the charity’s purposes, governance structure, and operational procedures.
- Application to OSCR: Submit an application to OSCR, including the new constitution, details of trustees, and information about the charity’s activities and finances.
- Application to Companies House: For a company limited by guarantee, an application to Companies House is also required, including the articles of association and details of directors (charity trustees).
- Name: Prior consent from Companies House may be required for both a SCIO or a company limited by guarantee if using a ‘sensitive business name’.
4. Transfer assets and liabilities
Once your new legal structure is approved, you’ll need to transfer the charity’s assets and liabilities from the unincorporated charity to the new SCIO or company. This process involves:
- Property and contracts: Transfer ownership of property, leases, and contracts to the new entity.
- Bank accounts and investments: Open new bank accounts in the name of the new entity and transfer all funds and investments. Notify your bank and investment providers of the change. As part of this process, a fresh application for HM Revenue & Customs charitable tax recognition will also be needed once the new bank account is operational.
- Staff and volunteers: Transfer employment contracts and volunteer agreements to the new entity. Ensure that all staff and volunteers are informed, and their rights are protected.
5. Update records and notify relevant parties
After the incorporation is complete, it is important to update your records and notify relevant parties of the change. This includes:
- Winding up: Following the transfer of all assets and liabilities, the unincorporated charity should be wound up. This includes obtaining OSCR’s prior consent to wind up and providing the regulator with requested supporting evidence to remove the “old” charity from its register. The new Record of Mergers, which (at the time of writing) will shortly be live on OSCR’s website, may help ensure legacy income is captured by the newly incorporated charity.
- Funders and donors: Inform your funders and donors of the new legal structure and provide updated bank account details for future donations.
- Insurance providers: Update your insurance policies to reflect the new entity and ensure that all necessary coverage is in place.
- Public and online presence: Update your charity’s website, social media profiles, and marketing materials to reflect the new legal structure. Ensure that all public-facing information is accurate and up to date.
Conclusion
Incorporating your charity can provide significant benefits, including limited liability and a separate legal personality, giving your organisation a sustainable legal framework to support its work and public benefit for years to come.
By carefully assessing the implications, engaging with stakeholders, preparing the necessary documentation, transferring assets and liabilities, and updating records, you can ensure a smooth and successful incorporation process.
This change can help strengthen your charity’s governance, enhance its credibility, and enable it to continue making a positive impact in the community.
On the other hand, incorporation, for all its attractions, is not automatically the best choice for every small charity. Before leaping into it, it is crucial to take advice about the pros and cons, the due diligence required and the most efficient way to go about it.
Published 11 March 2025
