21 November 2016
What is a Charity?
A charity (otherwise known as a non profit organisation) is any organisation that is established for purposes which are exclusively charitable (the advancement of religion or education, the relief of poverty, and other purposes regarded as being for the benefit of the community) and which provide public benefit.
The Charities and Non Profit Organisation (Registration) (Guernsey) Law, 2008 requires all non profit organisations (i.e. charities) based in the Islands of Guernsey, Alderney, Herm and Jethou to register with the Office of the Registrar.
However there is an exemption from this requirement which applies to organisations with gross assets and funds of less than £10,000, or gross annual income of less than £5,000.
A charity is entitled to apply to the Director of Income Tax in Guernsey for certain exemptions from tax.
A charity can be structured as an unincorporated body or an incorporated body. An unincorporated body can be a charitable trust or an association, for example. An incorporated body includes a company limited by guarantee ("LBG") or a foundation (as found in both civil law jurisdictions, and certain offshore jurisdictions, such as Guernsey, Jersey, and the Bahamas).
In short, the choice of structure will depend on factors such as:
a) the desire for registration of the charity (which may be useful to receive third party donations) or tax incentives;
b) the desire/necessity for limiting the liability of the members;
c) the complexity of governance;
d) the succession aspirations or intended lifespan of the charity;
e) the personal preference of its members and familiarity with certain structures;
f) the desire for confidentiality; and
g) the set up and on-going costs of the structure.
Broadly, if a charity intends to invest or participate in investments or activities which could result in liability to its members then a limited liability vehicle such as a LBG or foundation is preferable. However, such vehicles are by their nature more publically exposed. If privacy is a key driver, an unincorporated vehicle such as a charitable trust or an association may be better.
What is a Charitable Trust?
A trust is a legally binding arrangement whereby the legal title, or ownership, of property is separated from the right to benefit from that property. It involves a person (settlor) transferring property (trust fund) to another (trustee) to hold for the benefit of another person/s (beneficiary/beneficiaries) or purpose.
A charitable trust is a trust that has been established purely to benefit one or more purposes, that is, or are, recognised by law as "charitable".
What are the Advantages of using Charitable Trusts?
The main advantage of a trust is that any assets settled into the trust cease to be part of the settlor's estate. Therefore, charitable trusts can preserve wealth for those with charitable intentions because they can be a tax-efficient way to give.
Whilst charitable trusts do require setup and ongoing maintenance costs, these are not as high as those required for incorporated vehicles.
Unlike foundations or LBGs, there is no central register for trusts and therefore no information about a trust is publically available.
Non-Charitable Purpose Trusts for Charity
These are primarily used by clients who seek a flexible option for charitable (and non-charitable) giving.
What is a Purpose Trust?
The concept of non-charitable purpose trusts is to establish a trust without ascertainable individual beneﬁciaries and instead to specify purposes, which need not be charitable but can be. One important feature of a non-charitable purpose trust, which does not apply to beneﬁciary trusts, is the requirement for an “enforcer”. An enforcer is a person, who is separate from a trustee, whose duty it is to enforce the trust in relation to its non-charitable purposes. Otherwise, all other features of beneﬁciary trusts apply, such as, among other things, an unlimited duration period and the lack of requirement for it to be registered and open to public inspection.
What are the Advantages of using Purpose Trusts for Charity?
Because a purpose trust can have non charitable purposes as well as charitable ones, it is more flexible than a traditional charitable trust.
Purpose trusts can be very useful to promote or further a cause which is not recognised as "charitable" by law. For example, they can be used for purposes which lack an element of public benefit (and so would not be regarded as charitable), but which nonetheless are for worthy philanthropic purposes.
Charitable Associations – "Clubs"
A lot of charities fall within this group since it is easy to set up and administer an association. An association usually has a membership, who periodically elect members of a management committee to run the association and uphold the terms and conditions laid down in its constitution. These structures are popular for clubs which require some form of governance but only very light touch.
However, as an association is unincorporated, there is no protection afforded to the members should the association not be able to meet its debts.
Companies Limited by Guarantee (LBGs)
What is an LBG?
Unlike a company limited by shares, an LBG has no share capital or shareholders. Instead it has members who undertake to contribute a nominal amount towards any shortfall in the company's assets to settle its debts in the event of it being wound up. This nominal amount, set out in the company's articles, is usually £1 but can be any amount that is thought fit. Many small Channel Islands charities are structured like this.
As with any company, an LBG must be registered with the Company Registrar and a certain level of information about the LBG will be made publically available. LBGs are also subject to the same ongoing statutory requirements, such as maintaining registers and filing certain information with the Company Registrar.
Although by no means restricted in their application, LBGs are well suited to be used where the members do not intend to receive any payment for their interest in the company and, therefore, the funds of the company can be applied to further a charitable purpose.
What are the Advantages of using an LBG?
The main advantage of an LBG is that the directors and members of the company are, generally, protected from any personal liability for the company's debts. Only if the company is wound up and funding is needed to pay its debts are members liable to the extent of their guarantee.
Unlike a charitable trust, where trustees, as individuals, will hold the trust assets and contract on behalf of the trust, an LBG is able to hold property and assets and contract with other parties in it's own name. For example, the company can enter into all relevant contracts in order to buy or lease property, employ staff or purchase equipment.
The word "Foundation" has long been synonymous with charities but foundations are not necessarily always charitable and something with the name "Foundation" may actually be a trust. The Bill and Melinda Gates Foundation, for example, is actually a charitable trust, domiciled in Washington, US.
What is a Foundation?
A foundation is an entity with separate legal personality. It has characteristics similar to both companies and trusts, but is less prescriptive in its structure and constitutional documents than a company, without the distinction between legal and beneficial ownership found with a trust. A foundation is therefore a very flexible entity, capable of being designed to suit a variety of structures and needs.
A Guernsey foundation will have the following component parts:
- a constitution made up of a charter and a set of rules;
- a council to administer the foundation;
- a founder to provide the initial endowment; and
- (depending on the terms of the Foundation) a guardian.
What are the Advantages of Foundations?
We see foundations being commonly used by our clients from civil law jurisdictions that are uncomfortable or unfamiliar with trusts.
Unlike a trust, a foundation is a separate legal entity, and therefore it can contract directly and sue and be sued in its own name (like a company).
Whilst a foundation must be publicly registered in order to come into existence, limited information in respect of the foundation is publicly available, therefore if privacy is a key driver, a foundation might be the preferable option to an LBG.