Choosing the most suitable legal structure for a purpose-led organisation matters because it affects an organisation’s powers and liabilities, impacts access to funding and has tax implications. Charities and social enterprise are not themselves legal structures but must choose a structure that best fits their aims. Similarly, legal structures are not visible entities – David Alcock described them as “creations of legal fiction” unable to do anything except through people.

There are incorporated and unincorporated legal structures available for charities. When choosing a legal form for a charity or social business, consider the following factors:

• intention to distribute profits to shareholders or members (option for purpose-led businesses),
• purpose and activities of the organisation,
• level of liability protection needed for trustees or members,
• desired governance structure and flexibility,
• types of funding the organisation will seek and any restrictions imposed by funders,
• the tax benefits and obligations associated with each legal form.

For existing organisations, it may be useful to consider changing legal forms if, through growth or increasing complexity, they need a more robust structure, for example to provide limited liability to members. Incorporation is advisable when a charity wants to employ people, own land or enter major contracts.

The most common incorporated structures available to charities are the incorporated structures of Charitable Incorporated Organisation (CIO) and Company Limited by Guarantee (CLG). Incorporated structures have the benefit of limited liability and the ability of the organisation to act in its own name, e.g. employ people, enter contracts in the name of the organisation rather than the name of those who manage it (e.g. the trustees).

A company limited by guarantee is a common legal structure for charities in England, offering a formal, incorporated framework. Before the introduction of the CIO structure, this was the most popular legal form for non-profit distributing organisations. It has members rather than shareholders, who guarantee a nominal sum if the company winds up (usually £1). This structure provides the charity with a distinct legal identity, allowing it to enter contracts, own property and limit trustees' personal liability. However, it requires compliance with both the company and charity law, increasing administrative duties such as filing accounts with Companies House and the Charity Commission.

A Charitable Incorporated Organisation (CIO) is a legal structure introduced in 2013 and designed exclusively for charities in England or Wales, offering the benefits of incorporation without the need for registration with Companies House. This structure provides a distinct legal personality, allowing the charity to own property, employ staff and enter contracts in its own name. CIOs also limit trustees’ personal liability, making them an attractive option for charities with significant assets or liabilities, and for charities whose activities involve some risk. They are simpler to administer than a company limited by guarantee (CLG), as they don’t need to comply with company law. It’s no surprise that this structure has become a popular option for charities established in the last decade.

While many new charities use the CIO structure because of the advantages of single registration, the CLG form can be advantageous in certain circumstances:

• Can save time: as a familiar legal structure, it can be faster to register as a CLG with Companies House first, allowing new organisations to open bank accounts and apply for charity tax status with HMRC while simultaneously registering with the Charity Commission.
• Easier access to finance: Companies House provides a register for charges over non-land assets which third parties can access (there is no equivalent register for CIOs) which may improve access to loans.
• Group structure: if the charity is part of a larger group structure, a CLG form may be more appropriate.

While Community Interest Companies (CICs) cannot be charities, they are increasingly popular with social enterprises including trading subsidiaries of charities. Introduced in 2005 as a new legal form for social enterprises, CICs were introduced as a variation of the CLG form for social purpose organisations. CICs are registered both with Companies House and the CIC Regulator and must demonstrate in an Annual Community Interest Report how the CIC served the interest of the Community. They are governed by both company law and specific laws to CICs. They can be limited by shares or by guarantee, but CIC members cannot benefit personally from the accrued value of a CIC when it is wound up. CICs cannot be charities even if they have exclusively charitable aims, and they don’t benefit from the tax advantages of charities. They can be converted to charities (CIOs or CLGs), but it is not a straight-forward or quick process. The CIC structure could be suitable for a social business or a charity’s trading subsidiary.

• Find out more about on Community Interest Companies
• Find out more about the legal and regulatory framework for charities and the financial reporting and scrutiny regimes in different UK jurisdictions
• Watch the recording of the webinar ‘How to choose the best legal form for you charity or social business’ – the webinar also discusses Trusts, Unincorporated Associations, Co-operative Societies, Community Benefit Societies, Partnerships, Companies limited by shares and B Corp certification