Almost every trustee recruitment conversation contains a version of the same reassurance: it is unpaid, you are one of eight, and nothing lands on you personally. For most trustees of most charities that turns out to be true, which is why the sentence survives.
It is not a rule, though. It is an outcome, and it depends almost entirely on one thing decided long before you joined: whether your charity has its own legal personality. Trustees of unincorporated charities contract in their own names, and when the money runs out that is not a technicality. Here is what the exposure actually looks like, and what reduces it.
Structure decides the default
There are two families of charity and the difference between them is the whole of this article.
Unincorporated charities — charitable trusts and unincorporated associations — have no separate legal personality. They cannot own property, sign a lease, employ anyone or be sued in their own name. Every one of those things is done by the trustees personally, on the charity's behalf. Trustees are entitled to be indemnified out of the charity's assets for liabilities properly incurred, which is complete protection right up until the charity's assets run out. Beyond that point the liability is theirs, jointly and severally: a creditor can pursue any one trustee for the whole amount and leave them to chase the others.
Incorporated charities — charitable incorporated organisations and charitable companies limited by guarantee — are legal persons. The lease, the employment contracts and the debts belong to the charity. If it becomes insolvent, creditors are limited to its assets, and the trustees walk away owing nothing. Our comparison of charity and CIC structures sets out how the forms differ in other respects.
A worked example
The figures below are illustrative. A community charity with income of around £190,000 loses the local authority contract that funded two thirds of it and decides to wind up.
- Cash at bank: £49,000, of which £18,000 is a restricted grant for a youth project.
- Funds actually available to meet debts: £31,000.
- 26 months remaining on the premises lease at £1,850 a month: £48,100.
- Redundancy and notice pay for four staff: £22,400.
- Trade creditors: £6,500.
- Total liabilities: £77,000. Shortfall: £46,000.
In the unincorporated version, seven trustees are personally liable for £46,000 between them, and because the liability is joint and several, the landlord can pursue whichever of them looks most able to pay. In the CIO version, the shortfall stops at the charity.
Note what the restricted grant does not do. The £18,000 is sitting in the same bank account, and it is not available to pay the landlord. It is held for the youth project, and spending it on general liabilities would be a breach of trust that trustees could be personally required to make good — in an incorporated charity as much as an unincorporated one. Our post on restricted and unrestricted funds covers how to keep that boundary visible in the accounts before it matters.
The four things incorporation does not protect you from
Trustees of CIOs and charitable companies are not immune. Four situations reach through the corporate form.
1. Personal guarantees. A landlord, bank or vehicle lessor who wants comfort from an under-capitalised charity asks a trustee to guarantee the obligation personally. That signature is a personal contract and the charity's legal form has nothing to do with it. This is the single most common route to a trustee actually paying money, and it is usually signed by whoever happened to be chair that year.
2. Wrongful trading. Under section 214 of the Insolvency Act 1986, applied to CIOs as well as charitable companies, trustees can be ordered to contribute personally to the assets where they carried on incurring debts after the point at which they knew, or ought to have concluded, that there was no reasonable prospect of avoiding insolvent liquidation. Charities are unusually exposed here, because trustees keep a valued service running on the expectation of a grant that has not been confirmed.
3. Breach of trust or duty. Spending restricted funds on general running costs, paying a trustee without authority in the governing document, entering a transaction with an undeclared conflict of interest, or making a decision without taking advice that any reasonable trustee would have taken. The remedy is that trustees make good the loss to the charity personally.
4. Tax and employment liabilities. PAYE and National Insurance are debts of the employer, which in an unincorporated charity means the trustees. Even in an incorporated one, HMRC can issue a personal liability notice for unpaid National Insurance where the failure is attributable to the fraud or neglect of an officer.
What actually reduces the exposure
Incorporate. For any charity that employs staff, holds a lease or delivers contracts, the case for a CIO is close to unanswerable, and conversion is now a well-worn process rather than an exotic one. It is the only measure on this list that changes the default rather than mitigating it.
Buy trustee indemnity insurance, from charity funds. Section 189 of the Charities Act 2011 lets trustees buy cover out of the charity's own money without applying to the Charity Commission, provided they are satisfied it is in the charity's best interests and the governing document does not prohibit it. What it cannot cover is fixed by law: fines and penalties, criminal defence costs where the trustee is convicted, and liability arising from conduct the trustee knew — or must reasonably be assumed to have known — was not in the charity's interests. It protects the honest trustee who got something wrong, which is the trustee who needs protecting.
Make decisions the way section 191 rewards. The Commission has a power under section 191 of the Charities Act 2011 to relieve a trustee from personal liability for a breach of trust or duty where they acted honestly and reasonably and ought fairly to be excused, and the court has an equivalent jurisdiction. Honestly and reasonably is judged on the evidence, and the evidence is your minutes. A board that records the options considered, the advice taken and the reason for the decision is in a materially different position from one whose minute reads "the lease was discussed and agreed".
See insolvency coming. Wrongful trading is a liability created by delay. Management accounts within a fortnight of each month end, a reserves policy that states the trigger for action rather than an aspiration, and a standing cashflow item on every agenda are what convert a crisis into a decision. Our post on setting a reserves policy covers the calculation.
Keep the compliance floor. The annual return and accounts are due within 10 months of the financial year end, and a charity in default on the register is the first thing a funder or a court will see. Report serious incidents promptly rather than after taking a view; the Commission's consistent position is that a late report is treated far more seriously than an over-cautious one. Where your accounts are examined or audited, check which regime applies — the thresholds are moving, and our post on SORP 2026 and the new thresholds sets out the dates.
Who cannot be a trustee at all
Automatic disqualification applies to anyone who is an undischarged bankrupt, is disqualified as a company director, has an unspent conviction for dishonesty or deception, or — since the rules were extended in 2018 — has unspent convictions for specified terrorism, money laundering or bribery offences, is on the sex offenders register, has been found in contempt of court for making a false statement, or has been removed by the Commission for misconduct or mismanagement.
Acting as a trustee while disqualified is a criminal offence, and it is itself a serious incident the remaining trustees must report. A waiver can be applied for, and it has to be granted before the person takes up the role.
What to do this week
- Establish what your charity actually is. Read the governing document, not the register entry. Trust, association, CIO and company are four different answers with four different consequences.
- If you are unincorporated and you employ anyone or hold a lease, put conversion to a CIO on the next agenda as a decision item with a date attached.
- List every personal guarantee any current or former trustee has signed. Most boards discover at least one nobody remembered, and former trustees usually remain bound.
- Check whether you hold trustee indemnity insurance, what the limit is, and whether the governing document permits paying for it. If nobody knows, that is the answer.
- Reconcile restricted fund balances to the bank. If the restricted funds exceed the cash, the charity has already spent restricted money on something else and the board needs to know today.
- Read the last three sets of minutes as a stranger would. If a significant decision has no recorded reasoning, that is the one that will be hard to defend.
- Confirm the annual return date and who is filing it.
Where a specific liability is already live — a guarantee called in, a disputed dismissal, a possible insolvency — that is a matter for a charity solicitor rather than a checklist.
Where we help
We prepare charity accounts and independent examinations, keep restricted and unrestricted funds properly separated so a breach of trust never happens by accident, produce monthly management accounts that show a funding gap while there is still time to act on it, and work with trustees through conversion to a CIO. Fixed fees from £39 + VAT a month. Get started.
