Sharing experience – Why Become an English Charity?
Since the MGA (Myasthenia Gravis Association) became a member of EURORDIS I have had several discussions with colleagues from other patients’ groups about how best to achieve a recognised legal status as an international charity (not-for-profit organisation) under EU law. These discussions have occurred in the context of the formation of EuMGA (the European Myasthenia Gravis Association) which became a Registered Charity under the law of England and Wales in July 2009.
Unfortunately the EU nations have failed to enact legislation which could provide a framework for an international charity. It is therefore necessary to find a national legal framework which is satisfactory for the intended objectives and organisation of any proposed European international charity.
This paper will demonstrate that it is possible to create an international registered charity under the Law of England & Wales and that there are clear advantages in doing so.
Experience – The MGA and EuMGA
The MGA – an English Charity – has existed in its current legal form since 1997, when it became an incorporated registered charity under English company and charity law. MGA is an international charity because it operates under English, Scottish and Irish jurisdictions. Under the laws of England and Wales, there is no bar to any director of MGA being resident outside England in any country in the world.
The MGA, like many other English charities, is a company limited by guarantee, principally to reduce the personal financial liability of its directors.
The structure of MGA was used as model when the EuMGA was formed. EuMGA was registered as a not-for-profit company limited by guarantee in March 2009; it became a registered charity in July 2009. At the time of writing, there are six directors of EuMGA, resident in England, Denmark, Italy, Croatia and Romania.
The EuMGA is a company limited by guarantee principally to allow its directors to be resident outside England and Wales, but the directors also benefit from limited personal financial liability.
Advantages of Being a Registered Charity under the Law of England and Wales
English Charitable Sector
The charitable sector in England and Wales is recognised as being one of the most developed and effective in the world. At 30th June 2009 there were 166,807 registered charities operating under the law of England & Wales with a total annual income of £51 Billion. These charities range in size from those with an income under £10,000 per year (77,000 charities) to charities with incomes over £5 Million per year (1,672 charities).
The success of the English charitable sector is largely due to the highly developed legal framework in which it operates. The relevant law was updated by a new Charities Act in 2006 which strengthened the regulatory framework and introduced an important new test of ‘public benefit’ for registered charities.
English registered charities are strongly regulated by the Charity Commission which has wide-ranging powers to ensure that registered charities operate legally, effectively and in the public interest. The roles and responsibilities of Charity Trustees (Directors) are clearly established in law and enforced by Charity Commission regulation. All registered charities are obliged to publish accounts annually., and there are strict and comprehensive audit rules for the larger charities.
Because of this strong legal framework, there is generally a high degree of public trust in registered English Charities, which greatly assists charities in raising funds from public, corporate, and private sources. The English charitable sector has also earned a high degree of respect from Central Government, and is recognised as playing an essential role in national economic and social life.
Perceived Difficulties of Registration as an English Charity
Size of the Charity
Any organisation can be charitable under English law as long as its constitution declares it to be not-for-profit and established for the public benefit. However the requirements for registration as a charity are more rigorous and the process of registration is closely controlled by the Charity Commission. Very small charities (income under £10,000 per year) may be refused registration.
Public Benefit Test
Under the 2006 Charities Act, any charity wishing to be registered must pass a test of ‘public benefit’, which is applied very seriously by the Charity Commission. It is unlikely that any patients’ group would have a difficulty passing the ‘public benefit’ test. However there is one case which must be kept in mind; if a charity’s purposes are only political (lobbying etc) it will fail the ‘public benefit’ test. This would not prevent a charity engaging in lobbying as part of its activities, as long as its other activities were not political and were for the public benefit.
Residence of Directors
The main problem with English charity registration is that under English law, the Trustees (Directors) of a charitable trust must be resident in England or Wales. This problem can be completely overcome by using the ‘Incorporated Charity’ structure.
The Solution – A Registered Incorporated Charity
Most large charities registered under English law are ‘incorporated charities.’ A registered incorporated charity is a limited company which is registered as a charity.
To achieve this status a charity must first become a limited company under UK Company Law. UK Company Law provides for a special kind of limited company the ‘company limited by guarantee’.
Once the company has been registered under company law it can then apply for registration as a charity. The great advantage of this structure is that the Directors (Trustees) of the Charity and Company (the same people) can be resident outside of the United Kingdom, and do not have to be British.
There is an additional advantage which comes from being a limited company; the personal financial liability of the Directors is limited.
Charity Corporate Structure
Types of Limited Company
Under UK company law a limited company is an organisation in which its directors have limited liability for its debts. There are two main types of limited company: a public limited company has publicly traded shares; a private limited company does not have publicly-traded shares.
The private limited company is further divided into two sub-types; the most common is one in which the company has a shareholding, which is governed by the shareholders, but the type of private company interesting to charities is the ‘company limited by guarantee’.
The Company Limited by Guarantee
The ‘company limited by guarantee’ is most commonly used for not-for-profit organisations. It has no shares or shareholders, and the role of shareholders is performed by ‘members’. The members agree, as a condition of membership, to pay a fixed nominal sum (the guarantee) if the company has to be wound up. The amount of the guarantee, and the method for appointing members, is laid down in the company’s governing documents which are the Articles and Memorandum of Association.
Articles of Association
The Articles of Association define what the Company (Charity) is intended to do (its objects), and what powers it will exercise to achieve its objects. If the Articles are correctly drafted the company can apply for exemption from UK taxation as a charity (not-for-profit company). This can be achieved even if the Company does not later succeed in becoming registered with the Charity Commission.
If a company intends to apply for registration with the Charity Commission, it is essential that its Articles of Association should be drafted so that they will satisfy the Charity Commission’s requirement for a clear public benefit.
Memorandum of Association
The Memorandum of Association defines how the Company (Charity) will operate. It contains a set of rules defining such things as the composition and powers of the Board of Directors.
Registration as a Charity
Whereas company registration is quick and easy, registration with the Charity Commission can be slow and tedious. At present the Charity Commission is still developing its concepts of what can be interpreted as ‘for public benefit’ activities. The Charity Commission will show a lot of interest in what activities the company intends to perform, and how the company wishes to perform them.
Area of Operation
It is not necessary for the company to operate in England or Wales to qualify for registration as a charity under the law of England and Wales (as long as the company is resident – has a registered office – in England or Wales). English Charity Law recognises that activities can be for the public benefit even if they are performed outside the country. This great strength of English law is one of the reasons why UK is the home of some of the largest and most successful charities operating on the world stage. However, when applying for registration the company will have to declare in which countries it intends to operate. Care must be taken that these declarations are consistent with the Articles of Association.
Articles and Memorandum of Association
The Charity Commission will scrutinise the Articles and Memorandum of Association with great care and at great length.
It may be necessary to give evidence of income (or expected income). The Charity Commission is reluctant to register a charity with an income of less than £10,000 per year, but they are flexible on this point.
Advice From Experience
- Make sure that you obtain the advice and assistance of a lawyer who is experienced in English Charity and Company Law.
- Make sure that ‘your’ lawyer has experience in creating a registered incorporated charity which is designed to operate internationally.
- Take plenty of time, and follow the advice of your lawyer, when drafting the Articles and Memorandum of Association, and ensure that they accurately reflect what you intend to do, and how you intend to do it.
- Be prepared to change your Articles and Memorandum of Association at the request of the Charity Commission. Their reasons may appear inscrutable or pedantic, but there is little point in arguing with them. It is annoying to have to do this after registration of the Company, but it is not very difficult if you work with your lawyer.
- Keep the numbers of Directors and Members of the Company as small as possible until you have completed the process of charity registration – this greatly helps the process of making any necessary changes that may be requested by the Charity Commission – follow the advice of your lawyer on this.