The instruction of community interest companies (CIC) provided organisations with new ways to view profit and community. Like any hybrid system, the aim was to match a combination of interests. However, a combination of interests rarely remains in balance.
What then of the groups looking to sway into a full charity? Is there a method in place that instructs how to convert a CIC to a charity?
Originally, there was not. However, with changes to policy it is now not only possible to convert a CIC but relatively simple. An organisation only needs to go through fours steps to complete the process.
Even with such a small number of steps, the underlying paperwork isn’t always simple. That’s why it’s important to turn to KG Accountants for help in understanding regulation and processing a change.
CIC to a CIO – How to Convert
Before delving into the steps, understand that the conversion process changes the CIC to a charitable incorporated organisation (CIO). These have been around since the start of 2103 and are formed as a different structure than either a CIC or a charitable company.
A key difference is that a charity needs to register with Companies House, a CIO cannot do so. They do have to register with the Charity Commission, as will be explained in the steps below.
This difference in registration comes with advantages and disadvantages. On the positive, a CIO is not charged for filing this information, ongoing filings, and registrations with the Charity Commission.
Also on the positive side, CIOs do enjoy the tax breaks of a charity. They also gain well-recognized status charities receive which facilitates charity fundraising.
The downsides of converting to a CIO are largely seen in losing the benefits of a CIC. Board members of a CIC collect salaries whereas trustees cannot.
Board members also have direct control of a CIC, trustees have less influence. Investments and dividends are also lost through the conversion process.
Finally, despite similarities in intent and outcome, the internal workings of a CIO are different. There learning curve to adapt can be high.
1. Prepare a Resolution for Conversion
Changes to the regulations for Charitable Incorporated Organisations (Conversion) started 1 September 2018. The conversion process starts with a statement of intent to do so.
CIC members produce this statement, known as the conversion resolution. Not all of the members need to participate in the draft, nor do they need to confirm it. It is the task of the board of directors to draft the resolution, be they trustees or stockholders.
2. Adopt a CIO Constitution
With a resolution of conversion drafted, the CIC then needs to adopt a CIO constitution. It is advised to use a model from the governing documents to draft the CIO foundation model constitution, though this is not a requirement.
A crucial piece of information is the changing of CIC to CIO within the naming of the organisation. This is a simple error to make but causes problems when it occurs.
Winding up a CIO is different than a CIC. It’s advised an organisation pay special attention to Section 8 to complete this process.
For members liable for £10 or more, decisions need to be made in the CIO constitution. These options include if individual members will be held responsible to contribute to the CIO if wound up as well as their financial limit.
While this number can be different than what was originally listed for the CIC members contributions and liability, it cannot be less.
Section 2 and 2(i) cover the cases mentioned above. CICs with a liability structure equalling less than £10 per member select option 1.
3. Prepare a Resolution Adopting the Constitution
With the new CIO constitution drafted, the members of the CIC then need to confirm it.
They confirm the adoption of the constitution and the CIO is then formed. As this is a transition, not a wind up, no other actions in regards to a wind up need to be taken.
Members unwilling to confirm the resolution need to be removed. This is done through the CIC structure and its policies. Anyone who requires buying out must happen first. After that, the new restructured members adopt the CIO constitution.
4. Apply for Status
Reaching this step means that the CIO has been formed. The CIO then needs to be registered to receive charitable status.
Registration requires it’s own set of paperwork and applications. The CIO needs to submit the documents created above to show the conversion, the constitution, and the resolution to adopt that constitution.
They also need to complete and submit a trustee declaration from. This confirms the eligibility of each trustee. Trustees are expected to pass background checks, understand the intent of the charity, and agree to act as a trustee.
Applying for status also requires that the CIO confirm what charitable work they will be doing and take additional steps if that work will include vulnerable people or children.
A community interest company already goes through a test to confirm that they are benefiting their local community. That set of tests is looser than the ones given to a CIO.
A CIO needs to establish a charitable purpose, on that adds value to the public and is explained clearly.
If the Charity Commission accepts all of the applications to this point, then they register the CIO. When they register the CIO, the Regulator of Community Interest Companies confirms that the CIC is dissolved and converted to a CIO.
Once the CIC is deregistered the CIO registration is complete. These final steps are important to prevent duplication and overlap.
Benefits of Guidance
Don’t forget that while these are the four necessary steps in who to convert a CIC to a charity, they aren’t the only things to consider. Converting to a CIO has a recent, though established, pathway. Converting back to a CIC at a future time is possible but complicated and less refined.
Other legal structures exist that can help a CIC perform internally and contribute to the public.
When making this decision and going through the conversion process, it’s important to keep everything in order and proceed with confidence. The professionals at KG Accountants have dealt with this process and know what to avoid and how to provide guidance.
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