Information about structures and constitutions might be boring, but getting the legal structure of an organisation right is quite important – especially when a wrong structure may get in the way of doing the job properly, and changing it at a later date may be costly and time-consuming. Getting it right the first time round saves you money and makes the job a lot easier!
When deciding on a legal structure for any voluntary or community organisation you need to consider
- Setting up costs
- Size of the organisation
- Risk
- Charity status
- Democratic decision making
Types of Legal Structure
There are four main types of organisational structure open to a community organisation:
An unincorporated association
This is the structure adopted by many if not most community groups – many of whom do not even realise they are an unincorporated association! In fact, any group of people who band together in a formal context for some common purpose (not necessarily charitable) , are an unincorporated association unless they have adopted some other legal structure.
Unless such an association is charitable, there is no legal requirement for it to have written constitution or to register with any other body. You can find out more about this in the document ‘Responding to Public Issues’. Having a written constitution however helps avoid disagreements for e.g. about who should make decisions , how funds should be administered and how the organisation should be run. Constitutions are dealt with in detail in Governing instruments.
A limited company
The key feature of a limited company is that it is an incorporated organisation – which means that it has a separate legal identity, distinct from its members or shareholders. There are two forms of limited company.
A company limited by guarantee has no shareholders, but will instead have members who guarantee to pay a stated sum (usually £1) should the organisation become insolvent. Profits (‘surpluses’), if any, may not be distributed among the members, but must be used to further the company’s stated objects. This structure is commonly adopted by organisations seeking to achieve charitable and other social or political aims.
A company limited by shares is owned by its shareholders. It seeks to make profits which are then distributed among the shareholders. Limitation by shares is the normal structure for commercial enterprises, but charitable organisations sometimes set up a wholly-owned subsidiary as a company limited by shares to pursue non-charitable objectives.
Community Interest Companies have been designed as a new form of limited company suitable for social enterprises. The assets of a CIC belong to the company rather than the members. This might be a suitable format for a trading arm of a charity, or for an organisation which wished to avoid the restrictions of charitable status.
Charitable Incorporated Organisations are the standard structure for a charity which is incorporated it is subject to control by the Charity Commission alone and so Companies House has no involvement. Accounting procedures are straightforward and there should be less conflicting duties for directors.
A trust
Trusts are set up to hold money or property for clearly defined charitable purposes, which are set out in the organisation’s trust deed. Many village halls are set up as trusts. A trust does not have members, but is made up of a number of named trustees. The trust deed will set out how trustees are to be replaced if they resign, die or become disqualified.
An industrial and provident society
Industrial and provident societies are set up to carry out some industry, business or trade either on a co-operative basis or for the benefit of the community. They are incorporated, with limited liability for their committee members. They cannot register as charities, but must register with the Financial Services Authority (FSA). If their objects are charitable, they may obtain charity benefits by registering with The Revenue.
Unincorporated Associations and the holding of property
Information sheet ‘Responsibilities of Trustees’ includes information on the appointment of holding trustees and the services of the Official Custodian for Charities.
Which structure to adopt?
The decision on which structure to adopt depends upon a number of factors. The general issues involved are summarised in 'Quick guide to the different legal structures'. Since both trusts and industrial and provident societies tend to be set up for specialist purposes, the choice for most generalist community organisations will usually be between unincorporated association and company limited by guarantee status.
Managing the incorporation process
An organisation considering the incorporation process should be warned that the process can be lengthy and complex. Consultancy advice can prove advantageous and Community Matters’ consultancy service offers an incorporation package including advice and consultancy support throughout the whole process.
To find out more about the training and support available to you contact info@communitymatters.org.uk
For more information
To find out more about legal structures and charitable status then all you need to do is
select from the links below to download our set of publications.
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