Legal structures presentation
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- 1. Introduction to Legal Structures John Black Business
Adviser
- 2. Just Enterprise Business support and development services to
enterprising third sector organisations across ScotlandJust
Enterprise
- 3. Target Groups Enterprising Third Sector Organisations
Start-up Social Enterprises Established Social Enterprises
Equalities Groups Social Entrepreneurs Leaders, Managers and
StaffJust Enterprise
- 4. 1-1 Business Support Enterprising Third Sector Organisations
on training programmes may be eligible for 1-1 Business support
Small scale, targeted consultancy assignments In-depth, strategic
consultancy assignmentsJust Enterprise
- 5. Business Support can include Business Planning Feasibility
Study Legal Structure Marketing Plan Operational Review Costings
for procurement/tenderingJust Enterprise
- 6. Apply for support now at www.justenterprise.org.ukJust
Enterprise
- 7. Introduction to Legal Structures John Black Business
Adviser
- 8. Overview Raise awareness and knowledge Review legal
structure options Identify key charitable issues Identify directors
responsibilities Introduce Code of practice on Good GovernanceJust
Enterprise
- 9. What stage of development is your organisation currently at?
Discussion issues to consider Type of work you do Management, staff
resources and track record Any major liabilities e.g. Building,
staff Predictability of your future Current funding mixJust
Enterprise
- 10. Legal Structures for Voluntary OrganisationsJust
Enterprise
- 11. Types of legal structure: Overview Voluntary association
Trust Industrial & Provident Society (Community Benefit Society
or Bone-Fide Co-operative) Company limited by guarantee Company
limited by shares Scottish Charitable Incorporated Organisation
(SCIO) Limited liability partnership (LLP) Community Interest
Company (CIC)Just Enterprise
- 12. Types of Legal Structure: Advantages/Disadvantages
Voluntary association No formal registration requirements (other
than charity recognition process Less on-going admin. (e.g. no need
to notify changes in those serving on management committee) Very
limited legal overlay (e.g. no statutory rules for AGMs) Much less
intimidating for people wanting to get involved But Not treated as
a legal entity for most purposes Risk of personal liability for
those serving on the management committee [a serious
disadvantage]Just Enterprise
- 13. Types of Legal Structure: Advantages/Disadvantages Trust No
formal registration requirements (other than charity recognition
process) Less on-going admin. (e.g. no need to notify changes in
trustees) Limited legal overlay (as compared with e.g. a company)
Absence of member-level reduces administration But Does not have
full legal personality (so need to show linkage in trustees)
Possibility of personal liability for trustees (though lower risk
than in voluntary association) May be regarded by funders as more
exposed to abuse, since no accountability at AGMsJust
Enterprise
- 14. Types of Legal Structure: Advantages/Disadvantages
Industrial & provident society Full legal personality Limited
liability Body of statutory requirements is less detailed than for
companies Use of standard models may make formation process seem
more simple Useful vehicle for public share issue But Registration
procedures are needed to form an IPS Registration is more expensive
than company incorporation (where there are major departures from
model rules) On-going requirement to notify changes to the FSA
Statutory overlay and less flexible than for companies IPS
structure is unfamiliar to lawyers, many banks etcJust
Enterprise
- 15. Types of Legal Structure: Advantages/Disadvantages Company
limited by guarantee Full legal personality Limited liability
Companies House provides much more up-to-date framework than FSA
Can be charitable or be a CIC or neither But Registration
procedures are needed to form a company There are on-going
requirements to notify changes in directors, secretary, registered
office etc Major body of statutory and case law as overlay Can be
intimidating (as compared with voluntary association or trust) for
those wanting to get involvedJust Enterprise
- 16. Company Limited by Guarantee 1985 Companies Act still main
legislation but now 2006 Act as well Limited liability important if
you own assets, employ staff Democratic structure Registrar of
Companies Memorandum & Articles of AssociationJust
Enterprise
- 17. Memorandum & Articles of Association: Key areas Name
change needed? Objects: internal & external needs, outcomes
2-tier structure: members and Board Membership qualification Board
compositionJust Enterprise
- 18. Company limited by guarantee Decisions on: Members changes
to name, objects, articles directions to the board (rare)
winding-up ELECT AGM matters Board of directors Decisions on
management policy Overall supervision & controlJust
Enterprise
- 19. Types of Legal Structure: Advantages/Disadvantages Company
limited by shares Full legal personality Limited liability Readily
lends itself to detailed tailoring in relation to decision-making
and financial returns (e.g. through separate classes of shares) Can
be a CIC if appropriate But Registration procedures are needed to
form a company There are on-going requirements to notify changes in
directors, secretary, registered office etc Major body of statutory
and case law as overlay Company will be liable to tax, so not
optimum for a joint venture where one or more shareholders are
public sector bodiesJust Enterprise
- 20. Types of Legal Structure: Advantages/Disadvantages SCIO
Full legal personality Limited liability Simple model rules
(one-tier and two-tier) Limited legal overlay User-friendly
registration process with OSCR; and single-step (near as.)
registration and charity recognition process Limited on-going
requirements in relation to returns to OSCR [over time]
User-friendly guidance notes available from OSCR But Only available
if the objects are charitable Will take time to build up wider
recognition of what an SCIO is and why you would choose this
structureJust Enterprise
- 21. Types of Legal Structure:Advantages/Disadvantages LLP Full
legal personality Limited liability Very flexible in relation to
structuring of decision-making and financial returns (but very few
models available as yet) The members of the LLP are taxed on their
share of profits (not the LLP itself), so much more tax-efficient
than a company limited by shares in the context of a a joint
venture where one or more shareholders are public sector bodies But
Registration procedures are needed to form an LLP There are
on-going requirements to notify changes in members etcJust
Enterprise
- 22. Types of Legal Structure:Overview (cont.) Community
Interest Company (CIC) A type of company; a CIC can be either a
company limited by shares or a company limited by guarantee A
company that is a CIC will have C.I.C. (or Community Interest
Company), not Ltd, at the end of its name (if it is a plc, the name
will be ..Community Interest plc) A CIC must satisfy the community
interest test i.e. it must carry on activities which are for the
benefit of the community (or a section of the community) A CIC
cannot have charitable status, even if its objects are
charitable
- 23. Types of Legal Structure: Overview(cont.) A CIC cannot
distribute profits beyond a limit (the dividend cap) set by
regulations; but that limit does not apply to distribution of
profits to a charity Any surplus assets remaining on the winding up
of a CIC must not be paid/transferred to its members (except in the
case of a company limited by shares to the extent of the amount
paid up on the shares); the surplus assets have to be
paid/transferred to other CICs or to a charity or charities A CIC
has to issue an annual report describing the manner in which the
companys activities during the financial year have benefited the
community A company can be formed as a CIC; alternatively, an
existing company can convert to a CIC
- 24. Types of Legal Structure: Advantages/Disadvantages CIC
badges the business as sitting within the social enterprise sector
(or, in some cases, quasi-public sector) allows people setting up
the enterprise to retain control but within a social enterprise
model (not possible for employee- directors to have majority
control in a charitable company) may be more acceptable to funders
than a conventional private sector model (though will take time for
funding criteria to adapt) may be an attractive vehicle for private
sector investment But Does not carry with it any tax advantages Not
yet widely recognisedJust Enterprise
- 25. Core Governance, Roles &Responsibilities of
CompanyDirectors
- 26. Charities: issues Main benefit likely to be funding access
public benefit test 2005 Act: 15 charitable aims Documents to OSCR:
2005 Act laid down more formal obligationsJust Enterprise
- 27. New Definition of a Scottish Charity A body meets the
charity test if its purposes consist only of one or more of the
charitable purposes and it provides (or intends to provide) public
benefit in Scotland or elsewhere unless its constitution allows
distribution (on a winding-up or at any other time) for a
non-charitable purpose; or its constitution expressly permits the
Sc Ministers (or a Minister of the Crown) to direct/control its
activities (unless disapplied); or it is (or advances) a political
party For the purposes of s505 ICTA 1988, charity means a body of
persons established for charitable purposes onlyJust
Enterprise
- 28. New Definition of a Scottish Charity (contd) FIRST PART OF
THE TEST - the 15/16 charitable purposes: (a) The prevention or
relief of poverty (b) The advancement of education (c) The
advancement of religion (or philosophical belief) (d) The
advancement of health (inc. prevention/relief of sickness, disease
or human suffering) (e) The saving of lives (f) The advancement of
citizenship or community development (inc. urban or rural
regeneration, promotion of civic responsibility, volunteering, the
voluntary sector or effectiveness/efficiency of charities) (g) The
advancement of the arts, heritage, culture or science (h) The
advancement of public participation in sport (if physical skill
& exertion)Just Enterprise
- 29. New Definition of a ScottishCharity (contd) (i) The
provision of recreational facilities, or the organisation of
recreational activities, with the object of improving the
conditions of life for the persons for whom the facilities or
activities are primarily intended (j) The advancement of human
rights, conflict resolution or reconciliation (k) The promotion of
religious or racial harmony (l) The promotion of equality and
diversity (m) The advancement of environmental protection or
improvement (n) The relief of those in need by reason of age,
ill-health, disability, financial hardship or other disadvantage
(which may include relief through accommodation or care) (o) The
advancement of animal welfare (p) Any other purpose which may
reasonably be regarded as analogous to any of the preceding
purposesJust Enterprise
- 30. New Definition of a Scottish Charity(contd) The new
definition: Wording of charitable purposes slightly more in tune
with modern terminology, and slight widening of charitable field
Difficult to determine at this stage whether public benefit test
will represent an additional barrier, or introduce greater
flexibility Detailed approach will be built up through OSCR
policy/practice (currently, general guidance through Meeting the
Charity Test document; detailed guidance on particular objects and
public benefit test likely to be issued in stages, possibly in line
with review of existing charities) Approach taken by OSCR will,
over time, be modified and supplemented by decisions of Scottish
Charity Appeals PanelJust Enterprise
- 31. Practical Implications for Existing Scottish Charities All
Scottish charities will be required to file annual accounts and an
annual return; larger charities (gross income over 25k) will
require to lodge more detailed monitoring return Scottish charity
register will be available for public inspection Commitment by OSCR
to adopt proportionate approach to annual returns Also duty on OSCR
to review all entries on the Scottish charity register Active
review process should reduce incidence of irregularities/abuse;
wider powers should facilitate more effective action where abuse is
uncovered Non-Scottish charities operating in Scotland will require
to be entered in the registerJust Enterprise
- 32. Practical Implications for Existing Scottish Charities
Prior consent of OSCR will be required in relation to: change of
name, adjustment to objects clause, amalgamation, winding
up/dissolution Certain other changes require to be notified to
OSCR: any change to the charitys principal office (or, if no
office, then name/address of charity trustee who acts as key
contact), constitution, any other details set out in its entry in
the register, change of objects/amalgamation, winding
up/dissolution, administration order/ appointment of receiver
Specific duties are imposed on charity trusteesJust Enterprise
- 33. Legal Responsibilities of DirectorsJust Enterprise
- 34. Legal Responsibilities of Directors Key principles: company
law New legal duties for directors of companies with charitable
statusJust Enterprise
- 35. Directors Role & Responsibilities under Company Law
Role of directors Limitations on directors powers Duty of good
faith Duty to exercise proper care & skill Relationship between
the board and management staff Relationship between the board and
outside advisers Statutory obligations/liabilities Other legal
hazards Wrongful trading provisionsJust Enterprise
- 36. Role of Directors To take decisions on management policy
Generally control and supervise the activities of the companyJust
Enterprise
- 37. Limitations on Directors Powers Certain matters require to
be dealt with (under the Companies Acts) by the members; directors
can convene General Meetings but decision rests with members
Objects clause Restrictions in memorandum and articles (e.g. no
paid directors) Residual power of members to issue directions
(normally by special resolution) Authority of an individual
director: power to bind the company liability associated with
overstepping authority delegated by the boardJust Enterprise
- 38. Duty of Good Faith The board must always exercise the
powers of the company in a way which the board considers will best
further the interests of the company [note: slightly different test
applies to directors of a charitable company] Where a director has
a personal interest in a proposed contract he/she is under a duty
to disclose this he/she will (normally) be barred, in terms of the
articles, from voting on the relevant resolution A director
appointed to the board on the basis of nomination by some outside
body ought, in terms of the legal principles, to take decisions at
board meetings on the basis of what he/she considers will best
further the interests of the company - even if a particular
decision is in conflict with the policy of the outside body which
nominated him/herJust Enterprise
- 39. Duty to Exercise ProperCare & Skill PROPER CARE: each
director has a duty to take the same care in relation to the
companys affairs as a person would normally take in relation to
his/her own affairs [new charity legislation alters that standard
for directors of charitable companies] PROPER SKILL: each director
has a duty to apply to the best of his/her ability the skills and
experience which he/she actually has (the "wrongful trading"
provisions do, however, apply an objective standard)Just
Enterprise
- 40. Relationship Between the Board andManagement Staff The
practicalities of a typical voluntary sector company are such that
a high level of delegation by the board is inevitable ... but the
responsibility for overall supervision and policymaking remains
with the board An appropriate balance should be struck in relation
to delegation of powers, in particular: the board should ensure
that there are adequate reporting procedures the board should keep
under review the reliability and competence of senior employeesJust
Enterprise
- 41. Relationship Between the Boardand Outside Advisers In
certain circumstances it would be irresponsible (and a breach of
directors duties) for the board to proceed without first obtaining
outside professional advice It is important, however, that the
board should not follow outside advice blindly; the responsibility
for making the decision rests with the boardJust Enterprise
- 42. Statutory Obligations/Liabilities Company records &
returns: the Companies Act imposes responsibilities on the
directors personally with regard to the keeping of proper company
records and filing of returns with Companies House (especially
annual accounts and annual returns) Accounts and accounting
records: the Companies Acts impose duties in these areas on the
directors personally (now emphasised in the wording of the auditors
report).Just Enterprise
- 43. Other Legal Hazards Serious breaches of health & safety
legislation Claims by third parties who suffer injury etc if board
is grossly reckless Defamation, where board is party to the issue
of the defamatory material Company directors disqualification
orders Personal liabilities imposed under new charities
legislation; andJust Enterprise
- 44. Wrongful Trading Provisions The "bottom line" in relation
to these provisions is that a director would have to pay out of
his/her own personal funds and assets towards a companys debts if
it has gone into liquidation Fortunately, there are a number of
hurdles which have to be gone over before the court could order
this to be done; the following circumstances would have had to
apply: at some point before liquidation commenced, the director
knew, or ought to have concluded, that there was no reasonable
prospect that the company would avoid going into insolvent
liquidation as from the point when the director knew or ought to
have concluded that there was no reasonable prospect of avoiding
insolvent liquidation, he/she failed to take all necessary steps to
minimise further loss to creditorsJust Enterprise
- 45. Wrongful Trading Provisions FINANCIAL MONITORING: each
director should satisfy himself/herself that (a) the individuals
responsible for bookkeeping and preparing financial reports are
competent and reliable, (b) the accounting systems are adequate,
(c) financial information, in a form which would show up financial
difficulties, is presented to the board on a frequent basis and (d)
he/she personally understands the financial information which is
presented to the boardJust Enterprise
- 46. New Legal Duties Directors ofCompanies with Charitable
Status Charity trustees must act in the interests of the charity;
and must in particular seek in good faith to ensure that the
charity exercises its functions in a manner which is consistent
with its purposes act with the care and diligence that it is
reasonable to expect of a person who is managing the affairs of
another person in circumstances where a conflict of interest may
arise, put the interests of the charity first (or, where some other
duty prevents that, disclose the conflict and take no part in the
deliberations/decision) In addition, the charity trustees must
ensure that the charity complies with any direction, requirement,
notice or duty imposed on it by virtue of the ActJust
Enterprise
- 47. New Legal Duties Directors of Companies with Charitable
Status Breach of trustees duties specified above is to be treated
as misconduct in the administration of the charity The Act provides
that where a charity trustee provides services to a charity or
might benefit from any remuneration paid to a connected party for
such services, then (unless otherwise provided in a constitution in
force prior to the Act) the maximum amount of the remuneration must
be specified in a written agreement and must be reasonable the
charity trustees must be satisfied that it would be in the
interests of the charity to enter into the arrangement (taking
account of that maximum amount) less than half of the charity
trustees must be receiving remuneration or benefit from
remuneration the remuneration must not be expressly prohibited by
the constitution Remuneration contrary to the above will be
recoverable.Just Enterprise
- 48. Good Governance A Code for the Voluntary and Community
SectorJust Enterprise
- 49. Good Governance: Good Practice in Managing SEOsJust
Enterprise
- 50. Code of Governance Not mandatory Compliant with legal and
regulatory requirements, including those relating to charities It
links closely with other codes and standards e.g. the Charity
Commissions The Hallmarks of an Effective Charity and the new
booklet The Essential Charity TrusteeJust Enterprise
- 51. Governance Governance is high on the agenda in all sectors
As voluntary organisations working for public benefit you are
increasingly expected to demonstrate how well you are governedJust
Enterprise
- 52. A Definition One writer on governance defined governance as
being: the systems and processes concerned with ensuring the
overall direction, effectiveness, supervision and accountability of
an organisationJust Enterprise
- 53. Principles There are seven main principles that underpin
the Code and supporting principles underlying each of these is the
additional principle of equality - that of ensuring equity,
diversity and equality of treatment for all sections of the
community. We see this as fundamental to the work of all voluntary
and community sector organisations; rather than creating a separate
Equality section, the principle has been applied throughout the
Code.Just Enterprise
- 54. Principles Principle 1: Board leadership Every organisation
should be led and controlled by an effective Board of trustees
which collectively ensures delivery of its objects, sets its
strategic direction and upholds its values. Principle 2: The Board
in control The trustees as a Board should collectively be
responsible and accountable for ensuring and monitoring that the
organisation is performing well, is solvent, and complies with all
its obligations. Principle 3: The high performance Board The Board
should have clear responsibilities and functions, and should
compose and organise itself to discharge them effectively.Just
Enterprise
- 55. Principles (contd) Principle 4: Board review and renewal
The Board should periodically review its own and the organisations
effectiveness, and take any necessary steps to ensure that both
continue to work well. Principle 5: Board delegation The Board
should set out the functions of sub- committees, officers, the
chief executive, other staff and agents in clear delegated
authorities, and should monitor their performance.Just
Enterprise
- 56. Principles (contd) Principle 6: Board and trustee integrity
The Board and individual trustees should act according to high
ethical standards, and ensure that conflicts of interest are
properly dealt with. Principle 7: Board openness The Board should
be open, responsive and accountable to its users, beneficiaries,
members, partners and others with an interest in its work.Just
Enterprise
- 57. The Way You Govern The way your organisation governs will
be different depending on your circumstances The size of the
organisation How long in existence Culture and valuesJust
Enterprise
- 58. Good Practice Checklist Appropriate and transparent
structures should be in place Balance of skills should be right Be
in charge Everyone should know what they are responsible for and
what they have to do Delegate jobs the committee cant do take on
staff volunteers or even a consultant.Just Enterprise
- 59. Good Practice Checklist Follow your own rules governing
document Keep written records of meetings - important decisions are
made Financial management is vitally important Plan to deal with
problems should disputes arise Prepare for risksJust
Enterprise
- 60. Good Practice Checklist Seek professional or specialist
advice when needed even the most qualified/experienced committee
needs advice Check which laws and regulations apply to your
organisation e.g. compliance with charity law Know where you are
going as an organisation - your strategy - governing document Make
sure committee meetings are well run balance of skills knowledge
and experienceJust Enterprise
- 61. Good Practice Checklist Make sure conflicts of interest are
declared, recorded and dealt with openly Make sure any payments to
committee members are allowable in law Make sure that the committee
is in control with respect to compliance with the law, its own
rules and any other regulations Information is key to
complianceJust Enterprise
- 62. Good Practice Checklist Monitor the organisations progress
against its plans performance targets delivered Keep an eye on the
finances get regular financial reports deal with any major
variations from budget Make meetings work meet as often as you need
Chair is most important role in meetingsJust Enterprise
- 63. Good Practice Checklist Consult and inform all stakeholders
staff, volunteers, funders, members and partners Set up ways to
consult and inform Annual reports/accounts Quarterly newsletters
Website Public MeetingsJust Enterprise
- 64. Good Practice Checklist Review performance of committee
Compare the existing skills of committee against what is needed for
the future Recruit or train? Succession?Just Enterprise
- 65. Good Practice Checklist Review organisations/projects work
Has it achieved what it set out to do? Is the work still
relevant?Just Enterprise
- 66. Thank you!Just Enterprise