Which legal structure is for you?

The legal structure of an organisation refers to the way in which it has been established and the rules which govern it.

structure

There are a range of choices; it is important to choose a legal structure that is fit for purpose and meets your needs. The choices that you could consider are introduced below:

Unincorporated Association

Many small community groups or voluntary organisations are unincorporated associations. An unincorporated association is a group of people who have come together for a particular purpose. Unincorporated associations often have a broad membership which elects a management committee to deal with the running of the organisation. However, the crucial thing to bear in mind is that if you choose an unincorporated association then the individuals involved are personally liable for the risks, liabilities and debts of the association.

An unincorporated association can not enter into contracts, leases or indeed employment contracts on its own, the individuals who manage the organisation (the management committee members) must do so on behalf of the association. 

The advantage of an unincorporated form is that it will usually be subject to less regulation. Furthermore, the governing document, in the case of an unincorporated association is known as a constitution (or sometimes just ‘the rules’) and is simpler to understand. 

Model constitution

A model constitution for unincorporated associations is available from the Charity Commission website. A model constitution for an unincorporated association, with charitable objects and an annual income of £5,000 or below is also available from the Charity Commission website.

Trust

Another kind of unincorporated legal structure is a trust. A trust is established by a trust deed. This is a document under which an individual or organisation gives assets to other individuals or organisations on condition that they do not use the assets for themselves but for a third party for a particular purpose. An organisation which is a trust will almost always have charitable status because trusts for non charitable purposes are not valid under English law. A trust does not have members. The governing document of a trust is a Trust Deed.

Model Trust Deed

The Charity Commission have created a model trust deed for a charitable trust 

Company

To incorporate is to form a company. If an organisation incorporates then the organisation takes on a legal personality! In addition, in a company the committee members are called directors and they become one body - a corporate body. Thus, it is the organisation that enters into contracts, takes on leases, employs staff and most wonderful of all the individual people involved are not personally liable for the acts of the organisation (except in certain circumstances).

The exceptional circumstances include:

  • Dishonesty
  • Fraud
  • Negligence
  • carrying on activities which are not permitted by the company“s objects or powers clauses
  • carrying on the company“s business and running up further debts when it is known that the company is in financial difficulties and should be wound up
  • signing a form to act as a guarantor for a debt owed by the company
  • acting while disqualified as a director
  • being in breach of a statutory duty

Being a company means the accounts must be prepared on an accruals basis and be submitted to Companies House within 9 months of the financial year end. A fine is incurred if this deadline is not met. Contact info@wycas.org.uk for further support.

A Company Limited by Guarantee is a suitable legal form for organisations that wish to register the company as a charity. Companies are regulated by Companies House. The governing document of a company is a Memorandum and Articles of Association.

Model Memorandum and Articles of Association

model memorandum of association and model articles of association for charitable companies are available from the Charity Commission website.

Charitable Incorporated Organisation (CIO)

A Charitable Incorporated Organisation (CIO) can only be used by an organisation that is charitable. This provides the benefits of a legal entity and limited liability without the need to register a company with Companies House. Registration for CIOs is with the Charity Commission only. However, this form of incorporation is not suitable for all organisations. The Charity Commission states that "We think that the CIO will be most suitable for small to medium sized organisations which employ staff and/or enter into contracts. If your charity is likely to want to issue debentures, a company limited by guarantee will be a better option for you".

Note also that exempt charities cannot be Charitable Incorporated Organisations.

A CIO’s governing document is its constitution.

Model Constitution for CIOs

There are two separate types:

  • Foundation model constitution: the only voting members are the trustees.
  • Association model constitution: with a voting membership in addition to the trustees.

The Charity Commission have created model constitutions for both scenarios.

Accounts must be submitted to the Charity Commission within 10 months of the year end, but can be prepared on a cash or accruals basis. Contact info@wycas.org.uk for further support.

Community Interest Company (CIC)

Community Interest Company (CIC) is a legal structure suitable for organisations that wish to be a social enterprise.  A social enterprise is not a legal structure but an approach to business with social or environmental purpose and where surpluses are reinvested into the business or community. A CIC cannot be formed or used solely for the personal gain of a particular person, or group of people. 

A CIC can be a private company limited by shares or a company limited by guarantee.A word of warning here. Most funders are not happy to fund community interest companies limited by shares.

A CIC has an asset lock - this means that the CIC can only use its assets and profits for the community specified.

A CIC must meet the Community Interest Test.This means that the regulator must be satisfied that the activities will be carried out for the benefit of the community.

A CIC cannot be a charity and is therefore more likely to incur a Corporation Tax liability. The accounts must be prepared on an accruals basis and be submitted to Companies House within 9 months of the financial year end. A fine is incurred if this deadline is not met. Contact info@wycas.org.uk for further support.

The governing document of a CIC is a Memorandum and Articles of Association. For more information about Community Interest Companies visit Department of Business, Innovations and Skills website.

Registered Society ( Previously known as Industrial and Provident Society)

Registered Society refers to all the societies registered under the Co-operative and Community Benefit  Societies Act 2014. These include Co-operative and Community Benefit Societies. Please note that societies previously known as Industrial and Provident Societies are now referred to as Registered Societies

For more information about Registered Societies visit the Financial Conduct Authority (FCA) website

For details of the effect on societies registered before August 2014 see

https://www.fca.org.uk/firms/registered-societies-introduction/co-operative-community-benefit-societies-act-2014

Please do not panic. No change of name is needed even if the society has Industrial and Provident Society in its name; registered number remains the same; Rules do not have to be changed.

Accounts must be prepared on an accruals basis and submitted to the FCA within 7 months of the financial year end. If the turnover is over £90,000 there must be a report from a qualified auditor. Contact info@wycas.org.uk for further support.