The Beatles nearly wrote this on charity legal entities, but instead penned a ditty about Sgt. Pepper’s Band. Here’s how it nearly went:-
It was ten years ago (almost) today
The 2005 Act allowed the SCIO to be in play
It’s been going further and further into style
And it’s guaranteed, on most governance issues, to raise a smile
So may I introduce to you
The legal vehicle many (but not all) have known all these years
The Scottish Charitable Incorporated Organisation brand.
The Scottish Charitable Incorporated Organisation is 10 years old
In April 2011, the SCIO became available to use as a legal vehicle for Scottish charities. So, as it is 10, we consider 10 key things (imaginative, eh?) about SCIOs.
Limited liability
In the lead up to the SCIO launch, this was viewed as the main advantage. It is a big plus, but as we will see, there is more to the SCIO than simply sheltering trustees from liability risk. Nevertheless, limited liability is a valuable characteristic of the SCIO.
It is a legal ‘thing’
A SCIO is a legal person in its own right. It has a corporate personality. This makes it easier, clearer and more cost-effective when documenting how a charity owns assets, including land, and enters into contracts or employs people. It is the SCIO and not some amalgam of trustees, from time-to-time, who embody the charity in its legal relationships.
Flexible friend
Limited liability got the early attention. But the regulations setting out how SCIOs would really come into being provided opportunity.
Subject to certain minimum requirements, a SCIO could be created in a way that had a constitution to suit the needs of the particular charity. The governance framework and the relationship between e.g. trustees and members can be crafted to the individual requirements of the charity.
We have sometimes been inspired in this regard by Brazilian architect, Oscar Niemeyer (helpful first name!). He worked in concrete (base legal governance entities) but added some shape and flourish (like a SCIO can!).
They’ve been popular
When the concept of the SCIO was devised it was thought that small(er) charities would mostly use it. It has turned out to be much more widely used. About 20% of the total Scottish charity register is made up of SCIOs. Around 70% of new registrations are now using SCIOs.
Perhaps the mix of limited liability and flexibility has meant that, after careful consideration on legal entity choice, the SCIO would be the right fit for a wide-range of size and type of charity. We have seen very, very small charities use the SCIO (keeps things as ‘light’ as possible). We have seen grant-making charities enjoy the advantages of a SCIO as well as escaping or avoiding quirks of trust law (the old grant-making charity type of choice). Operating and facility-running charities have also found the SCIO appropriate for their needs.
Some will still want to use a company: borrowing
One factor that we do see leading to some (a small proportion) of charities electing to use a company for their legal vehicle is on borrowing. A company but not a SCIO, can grant a type of security known as a floating charge. For some, keeping that option open is valuable enough to merit choosing company over SCIO. But beyond that, a company and SCIO will have very similar risk and legal personality characteristics.
The path of a little bit of resistance: incorporating an existing charity into a SCIO
To return to the Beatles:
“I don’t really want to stop the show
But I thought that you might like to know“
For many existing charities that are trusts or unincorporated associations, becoming a SCIO could be a good governance step. They should at least consider the option. For some it will definitely be the right thing to do. It is also likely to be viewed as a more attractive proposition to future prospective trustees than a trust or unincorporated association – with the spectre of unlimited personal liability and other ‘nasties’ and quirks.
But it is not simply a case of ‘converting’ into a SCIO. There is process and issues to consider around the movement of assets, contracts, funding, loans and employees from the existing charity to the SCIO. There are also issues around future legacy income to consider. The process towards a SCIO is likely to be (very) worth it, but there are steps and points to think about.
SCIOs can wind-up and transfer assets to non-SCIO charities
There, we’ve said it. This is often cited as a problem with SCIOs. But it is not a real issue. Just a case of new procedures coming into being when the SCIO was created to facilitate legal steps which did not exist before the SCIO was born. So, follow the correct process, but the ultimate end result will be the same. SCIOs can come to an end and pass its assets to another charity, of whatever type.
SCIO members have legal duties: good or bad thing?
SCIOs must have trustees and members. In some cases they are the same people (sometimes called ‘single tier’). Where the members are separate (‘two-tier’), the powers and duties of members need to be remembered.
Their role in the governance of the SCIO could be essential. The Charites and Trustee Investment (Scotland) Act 2005 places certain trustee-esque duties on members. Nothing that should be overly burdensome in most cases and it can also empower the members in holding trustees to account. Members of charitable companies also have similar duties to SCIO members.
SCIOs and CIOs are different
CIOs are English. SCIOs are Scottish. They come from the same conceptual place, but have turned out differently. The ‘pros’ and ‘cons’ of each are not directly mirrored in each other despite the similar names.
Charity focussed legal entity
The SCIO offers a legal vehicle which is rooted in charity law. Charitable trusts or companies need to consider the impact or trust or company law as well as charity law and regulation. And when trust or company law changes, they might do so without the any impact on charities being at the core (or even the suburbs!) of any reform.
The SCIO being governed by charity law simplifies matters. It reduces some unnecessary administration and avoids any conflict between charity law and other areas of law. Where there are legal developments, they are updates to charity law, rather than the charities effect being an afterthought or worse. Of course, SCIOs need to consider the tax treatment of being a charity, as any other legal entity choice does.
… and an eleventh thing… informed choice on legal form
In November 209, I write in Third Sector that the SCIO did not offer a panacea. Now, at that time, we did not know exactly what the SCIO would look like. The regulations that actually set out what a SCIO is and could be offered, as I think we have seen, a very attractive legal structure option. But it still was never going to provide a panacea.
There are still options to carefully consider notwithstanding the SCIO having many attractive features.
Indeed, those options start with points such as ‘is charitable status helpful for our aims?’ or ‘do we need a trading subsidiary?’ or ‘what about a CIC?’.
It is also important that the terms and internal structure of a SCIO, if that is the appropriate legal form, are right for your organisation.
The SCIO is a very valuable, useful and welcome addition to the legal landscape. But thought and consideration is needed in deciding what is best. That early consideration will avoid any later need or desire to reverse out of a structure that might not suit future requirements. While about 70% of new registrations are using the SCIO, there should and will be good and valid reasons why the other 30% have decided to use a different legal vehicle for their project, activities and purposes.
The SCIO is a very useful legal option, but it is not a panacea.
For help and advice on charity law and legal issues for charities, get in touch with Alan Eccles: alaneccles@bkf.co.uk / 07470808717.
“He is an experienced lawyer who is very well known among sources for advising clients on charity law matters.” Chambers High Net Worth 2020
Alan is “highly experienced in advising third sector organisations” … “efficient and has a very in-depth knowledge of the Scottish charity scene” Chambers & Partners 2020
Alan worked on the development of OSCR’s “A Guide to Incorporation” publication.
Scottish charity and wealth law 