An initial question for an individual or group seeking to establish a new charity in Scotland is whether to set it up as:
- a trust,
- a company,
- an unincorporated association, or
- a Scottish Charitable Incorporated Organisation (SCIO).
There are advantages and disadvantages in each case.
If personal liability is a concern, the choice can quickly be narrowed down to either a company or a SCIO, but from here the choice can become more difficult.
In some cases, a company will be chosen because it can be registered (with Companies House) at relatively short notice and progress can be made (e.g. in setting up a company bank account) at the same time as the application for charitable status is being submitted to and considered by OSCR.
Conversely, a SCIO doesn’t exist (and can’t legally operate) unless and until OSCR accepts the application for charitable status. The SCIO comes into existence at the same time as it receives its charitable status. This can take weeks or months, depending on the complexity of the application. However, a short delay in the setup phase may be a price worth paying, as the internal rules of a SCIO can be much more flexible than the internal rules of a company. In the case of a SCIO, those rules are set out in a ‘constitution’. In the case of a company, they are known as ‘articles of association’.
The articles of association of a company are quite rigid because they must work within a framework set out in the Companies Act. Among other things, the Companies Act stipulates that a resolution (decision) of the members of a company must be passed as a written resolution or at a meeting of the members. Additional rules follow in relation to the circulation/approval of written resolutions and convening meetings. Some decisions require special resolutions, i.e. approval by those members together controlling 75% or more of the voting rights. Strict timescales apply in relation to written resolutions.
It is important to note the Companies Act applies to commercial companies (private and public) as well as charitable companies. A charity founder who is already familiar with decision making in a company may prefer to stick with what they know. The purpose of this article is not to promote SCIOs over companies – each has its place – but to highlight the relative flexibility of SCIO constitutions.
The rules concerning SCIO constitutions are set out in the Charities and Trustee Investment (Scotland) Act 2005 and the Scottish Charitable Incorporated Organisations Regulations 2011. The Regulations state that the constitution of a SCIO must ‘make provision about’ certain things, including how resolutions may be passed, but they are nowhere near as prescriptive as the rules relating to companies.
For example, a SCIO constitution can provide for an entirely novel form of decision-making, such as an online voting system which can be operated in tandem with (or instead of) a physical meeting. This may allow a greater number of members to participate in decision-making. It also recognises we live in a world where greater flexibility is required and technological solutions are expected. This would certainly pass the test of ‘making provision about’ how resolutions may be passed.
To give another example, the Companies Act provides a statutory right for company members to appoint proxies to attend, speak and vote on their behalf at meetings. This adds a layer of complexity and uncertainty for the meeting organiser and chair. There is no requirement to provide for proxy voting by SCIO members, although it can be included if those who are establishing the charity feel it might be useful. It is optional, not mandatory.
Template SCIO constitutions often borrow concepts from company law, and I personally see that as a great starting point. However, it should not result in SCIOs being operated in the same way as companies where that is unhelpful to trustees and members. There is an opportunity to develop alternative ways of doing things within the more flexible SCIO framework.
If you are seeking to establish a charity in Scotland we recommend seeking professional advice. Our charities team can advise you of the most effective structure for your circumstances and ambitions.