Unincorporated Entity - considering becoming a SCIO
A charity which is an unincorporated association does not technically exist as a separate legal entity. This means that an unincorporated association cannot strictly enter into contracts, own property, and sue or be sued in its own name. There is also the risk that the trustees or members of the management committee (and sometimes even the members themselves) can become personally liable for the debts and liabilities incurred by an unincorporated association.
The Scottish Government introduced the Scottish Charitable Incorporated Organisation (SCIO) legal form in April 2011 to address some of these difficulties. There are 3 key advantages to being a SCIO as opposed to being a charity which is an unincorporated association:-
- SCIOs benefit from having separate legal personality which means a SCIO can undertake transactions directly and can enter into contracts, leases, employ staff and own property in its own name;
- the liability of the trustees of a SCIO is in most cases limited; and
- unlike charitable companies which are regulated by the Registrar of Companies and the Office of the Scottish Charity Regulator (OSCR), SCIOs are regulated only by OSCR and must comply with Scottish charity law.Unincorporated Entity - considering becoming a SCIO
Converting to a SCIO as a legal form can provide greater clarity (and indeed protection) for trustees and members (including prospective members) of the organisation in relation to responsibility for the debts and liabilities of the charity. In terms of succession, using a SCIO means title to heritable property can be held in the name of the SCIO as opposed to the names of individual trustees which will inevitably change over time (often on an annual basis). Unlike a company or trust, a SCIO is distinct from other charities on the Charity Register in that its existence is dependent upon its charitable status.
OSCR's guidance notes that the constitution of a SCIO (its governing document) must contain a number of basic elements in relation to its governance and other key matters. The SCIO must also:-
- have its principal office in Scotland;
- have at least two members (these may include some or all of the charity trustees subject to the terms of the constitution); and
- use and apply its property in furtherance of its charitable purposes and in accordance with its constitution.
Changing the Legal Form - Implications
Changing the legal form of your organisation will have legal implications and so trustees should always seek legal advice before proposing or implementing any change. Trustees must always act in the charity's best interests so they should not propose a conversion simply to minimise their own potential personal liability. Each organisation's circumstances will be unique and it may be that conversion is not the most appropriate course of action in each case.
If the decision is taken to proceed with a conversion then here are some of the issues which tend to crop up most frequently (this list is not exhaustive):-
Where an unincorporated association with employees converts, it is likely that the Transfer of Undertakings (Protection of Employment) Regulations 2006 will apply which means that certain processes will need to be followed to make sure employees' rights are protected.
The position regarding employee pensions needs to be carefully considered. If the unincorporated association is a member of a multi-employer defined benefits pension scheme then care needs to be taken to consider if the conversion will result in the crystallisation of the "employer debt" and to ascertain what steps need to be taken to deal with this.
You should consider all of the different kinds of contracts the unincorporated association has entered into and whether the conversion could trigger default or early termination of those contracts and what the consequences of this could be.
- Other regulators
If your organisation is regulated by other regulators such as the Care Inspectorate, do not overlook the position those other regulators may take. Consider what steps should be taken to transfer or renew (or re-apply for) such registrations.
Speak to your bank well in advance of the conversion to ascertain if new accounts will need to be opened and what the implications will be for standing orders, direct debits and so forth and plan for this.
Tax and accounting
Speak to the organisation's accountant about the proposed conversion and seek their advice on the tax and accounting implications of converting.
Changes to the OSCR conversion process
OSCR has recently confirmed that it is removing one of two existing options for charities to change from being an unincorporated body to a SCIO or company. Therefore, from November 2016 charities will no longer be able to convert an existing organisation into an incorporated organisation.
The removal of the "fastrack" process will now mean that charities who wish to incorporate will need to apply for status as a new charity and seek consent to wind up the existing charity. OSCR are of the view that this will create a level of clarity that will be better for the charity and its relationships with other organisations.
Many charities have raised concerns that charities will have to change their name and charity number during the process to avoid a situation where two charities with the same name will appear on the register at the same time. With a view to alleviating some of these concerns, OSCR have suggested that the new SCIO could continue to have a very similar name (for example, by adding the word "SCIO" to the end of the original charity name).
OSCR are currently in the process of working with a number organisations to ensure that charities have the support and guidance they need to incorporate and a "step-by-step toolkit" is expected to be published in early 2017. Interim guidance will be available on OSCR's website for those applying before then.
This note is for information only, is not intended to be construed as legal advice and should not be treated as a substitute for specific advice.