A number of churches are thinking about the possibility of adopting the structure of a limited company, and some have already done so.
It’s still relatively unusual, however – so why do it, and what should churches bear in mind?
Why?
The main reason for becoming a company (‘incorporation’) is concern about the personal liability of trustees. The bottom line is that a trustee of a church that is not a company faces the risk of having to use his own assets to meet any shortfall in the church’s funds. In particular, as the volume and complexity of the laws affecting churches increase, there is a sense that the risk of litigation against churches may also be increasing. If the church were found liable for breaching these laws and could not pay (or was not insured for) the sums claimed, the trustees personally would be on the hook, even if they have acted properly. A court or the Charity Commission can relieve trustees of liability if they have acted honestly and reasonably, and ought to be excused — but they may have to get to court to find out.
How liability arises
There are essentially three legal structures that a church (or any other charity) can have. The first is a company, which I come back to below. The second is a trust — where someone entrusts their property to trustees, with requirements as to how it is to be used. Many churches will have a trust deed which states that the building which forms the trust property must be used for the purposes of Christian worship. The trustees are responsible for making sure the property is used for the purposes of the trust.
The third is an association — where a group of people collectively decide to pool some of their resources and use them for particular purposes. For a charity, such as a church, the purposes will be charitable (otherwise the group has effectively formed a private members’ club), and the members of the group cannot decide to use those resources for something non-charitable. Often the members will have a constitution that sets out how the group will be organised, and they will appoint particular people to act as trustees of how the property is being used.
There is then some overlap with the first model, and often churches are a mix between both. But, in either model, the charity’s property is owned collectively by the trustees or the members of the association. This means that, if the money runs out, and the charity ends up with more debts than assets, it is the trustees who are themselves in debt.
It may not simply be a case of the money ‘running out’. A financially stable and well-run organisation may suddenly find itself faced with a claim for unexpected costs for something like building repairs. More importantly, however, if someone brings a legal claim against a church — such as in relation to employment law, or health and safety — it will be the trustees who are named on the claim. In law, the trustees are individually liable for meeting the losses and costs of any claim that the court upholds, if they cannot be met from the church’s own funds and are not covered by its insurance policies.
The alternative?
If a church is structured as a company, it becomes responsible for its own assets and debts. For non-companies, the church is ‘nothing but’ the people who are the legal owners of the church’s property. By contrast, a company is a legal person in its own right. A claimant or creditor of the company cannot sue the company’s directors personally, except in very limited circumstances. This also means that the company is the entity named in any claim — individuals will still need to deal with it, but they do so on behalf of the company rather than on their own account.
What are the implications?
A church that is a company will have directors, who are also the trustees. Like all charity trustees, they are responsible for managing the company, ensuring that it achieves its stated purposes, remains solvent and is legally compliant.
The company will also have members. These are equivalent to shareholders in a profit-making company, but in a charity are simply those named as members in the company’s records. The limit of their liability is to pay a nominal sum — usually £1 — if the company is insolvent when it is wound up. They have other important roles, however. They can change the company’s constitution (if 75% vote in favour), and remove its directors (if more than 50% vote in favour). There are additional powers, exercisable by smaller majorities, that enable the members to hold the directors to account.
Often the directors and the members of a charitable company are the same people, exercising two different functions. In a church, however, particularly if it is structured on congregational lines, it may be appropriate for the leadership team to be the directors and for the church members to be the company’s members. This is one of the most important decisions for a church to make in considering incorporation.
A company also has a constitution (its ‘Articles’), which sets out how the company is to operate, e.g. who has the ability to take particular decisions, and how they are to be taken. This is the overriding governing document of the company, and any other statements or policies will be read in the light of it, if there were to be a dispute about whether decisions were valid. The Articles should be worded carefully, to reflect how the church actually functions in practice.
Advantages?
The main advantage of being company is the limited liability of its directors and members. (The trustees are still responsible for ensuring they comply with their personal legal duties, and whether or not the church is incorporated, they should ensure they have trustee indemnity insurance.)
There are some other less obvious advantages, however. For churches that wish final (human) decision-making powers to rest with the church members, it is helpful to have a structure in which the legal reality reflects this, which to an extent the corporate structure provides. Company law provides a ‘fall-back’ for how companies should operate, although there are drawbacks here too (see below). More mundanely, it is helpful — particularly in relation to the ownership of land — to have all the charity’s property in the name of the company rather than the trustees, and makes administration of property transactions more straightforward.
Disadvantages
There are some drawbacks, however, and your perception of their significance will probably depend on the role you play in church life! There are some stringent and somewhat technical administrative requirements.
A company must have a set of records containing details of directors, members, meetings, decisions and charges over the company’s property. Its full company details must be on stationery and websites. It must also comply with statutory requirements about sending formal notices of meetings — not only in terms of giving sufficient notice, but in enabling someone to act as a proxy on behalf of a member who cannot attend. The company must file specific forms and information with the Registrar of Companies (as well as the Charity Commission, if registered as a charity). Non-compliance with some of these obligations is technically a criminal offence on the part of the directors — remember that they are intended to ensure transparency on the part of directors about how the company is being run, and ensure that members are entitled to exercise their legal powers. In addition, the register of members must be available for public inspection, although inspection can be refused if it is for an improper purpose.
Perhaps the main drawback is that there is some mismatch between the statutory processes applicable to companies and the usual processes for decision-making in churches, because the constitutional structure of companies was created in the business world. While it is usually possible to adapt the Articles to reflect church practice, if there were disagreement about whether a decision was properly taken, the statutory framework may inflame the dispute rather than help resolve it.
Alternative for charities
You may have heard of an alternative structure open to charities, called a Charitable Incorporated Organisation (CIO). This should be available during 2011, although there have been delays in implementation and the exact form it will take is still unclear. The structure — and therefore the decisions involved — will probably be similar to that of a company. It is possible, however, that the more minimal legislation for CIOs will reduce the likelihood of the kind of conflict described above, and the administrative burden will almost certainly be lower.
To be or not to be a company?
It will be a matter for each church to weigh up the relative merits of this option. For any church that has significant property, a large membership or extensive activities, it is worth considering. No church trustee should need to worry about personal liability except if they are acting wrongfully — and the company structure is, at present, the most effective way of removing this risk. Any church that does become a company will need to make sure that: 1) its constitution is very clear about decision-making powers and processes; and 2) it is able to comply with the additional administrative requirements.
Caroline Eade is a solicitor specialising in charity law.
