Ready Steady Start

Choosing Your Legal Structureby Hackney CVS

Organisation Development Team Kishore Kanani

Funded by Organised in partnership with: Hackney CVS has achieved:

PROGRAMME

What are legal structures?

Types of Legal Structures

The Advantages & Disadvantages

What are legal structures?

What it says on the tin! A structure! Why is structure important? The legal aspect becomes an issue when a

group decides to write down rules on how operate

Structure, involves accountability why?

Types of Legal Structures

Community Groups and Voluntary Organisations Unincorporated Association Charitable Trust Charitable Incorporated Organisation (CIO) Charitable / Limited Company

Social Enterprises Community Interest Company Partnership and Limited Liability Partnership Industrial and Provident Society (Co-operatives) Development Trusts and Social Firms

Unincorporated association

A membership organisation It is the easiest, quickest and cheapest way for

a group to set itself up. This structure can be suitable for groups such

as play schemes, pensioners associations, arts and campaigning groups.

if your income grows larger than £5,000 than you must register with Charity Commission

Advantages & Disadvantages Unincorporated association

Advantages Simple and flexible Cheap to run Not accountable to any agency

but the Management Committee No need to submit accounts to

anyone outside (unless you register as a charity or funders demand it)

Charitable aims, will make it easier to register as a charity.

Disadvantages Funders prefer more formal

structure No separate legal existence - only

a collection of individuals Cannot own property in its own

right Cannot enter into contracts - if it

wants to rent premises or employ people, this is done in the eyes of the law by individuals on behalf the group

Management committee personally responsible for the group's obligations, debts and are liable.

Charitable Trust

A charitable trust is a legal form, set up by means of a trust deed. Aims must be charitable and registered with the Charity Commission.

Not a membership organisation but is run by a small group of people, known as trustees, who make all the decisions and have all the responsibility.

Trustees can be appointed for life when the trust is set up, or can be changed regularly.

Advantages & Disadvantages Charitable Trust

Advantages Cheap and simple to set up. no

registration fee Charity Commission publishes a

model declaration for a charitable trust (trust deed). Property can be held in the name of individual trustees for use by the charity but cannot purchase property in its own name.

Regulation by the Charity Commission gives a 'seal of approval' to its activities.

Some Funders find formal and stable structure reassuring

Disadvantages Obligations to draw up your

annual accounts and report in a particular way

A charitable trust is an unincorporated organisation which means that its trustees are personally liable for its obligations and debts.

You cannot carry out political or campaigning activities, but your group can have educational aims.

All decisions made by a small group of people (The Charity Commission suggests having between 3 and 9 trustees).

Company Limited by guarantee

Most common type of incorporated body used by groups in the voluntary and community sector.

Constituted by its Memorandum & Articles of Association.

Limited liability is important when considering borrowing large sums of money, buying land or buildings, or employing staff

Advantages & DisadvantagesCompany Limited by guarantee

Advantages Flexibility – Power from Companies Act 2006 to

alter both objects of a company and the regulations.

(ii) Corporate identity – A legal entity capable of owning property, or taking or defending actions in court. own property in its own name.

(iii) Limited liability –A legal entity, its debts and contracts belong to the company itself not to members. Not personally liable. Liability in event of going bankrupt, is limited to the amount guaranteed when becoming a member usually £1.00.

(iv) Involvement of members –Democratic structure where members have ultimate control over those managing the company. Directors are answerable to members for conduct of the company’s affairs and are capable of being removed from office by a resolution.

(v) Continuity – until wound up, has perpetual succession, ie it continues to exist, even though its members may change, die or cease to be involved.

Disadvantages

(i) Cost - of setting up is high. E.g. fee for drafting the memorandum and articles of association - the ‘governing document’. Registration fee at Companies House and producing the accounts in company format. Annual fee for making annual returns. Dissolving a company also involves time and expense.

(ii) Public Accountability - Companies’ details are stored and open to the public. May not be disadvantage to those voluntary organisations who want openness and accountability to general public and funders.

(iii) Bureaucracy – companies must comply with the statutory requirements of the Companies Act 2006 rules for the administration of a company. Need to comply can be a burdensome responsibility to voluntary management committee.

Charitable / Limited Company

A Charitable Company is a limited company with charitable aims.

Incorporated organisation meaning a legal identity separate from its members.

Directors not personally liable for its debts. Membership organisation must be named and a list of

members forms part of the Company Register Demonstrate, through Memorandum & Articles of Association

(its governing document) how it’s accountable to the community and charitable in its aims.

Involves registering with both Companies House and the Charity Commission.

Limited Company

There are two types of limited company: Company limited by guarantee

With no shareholders - any surplus is reinvested in the company. Recommended by the Charity Commission.

Company limited by sharesUsually found in the commercial sector, where its members (shareholders) are investing money in gaining a profit.

Advantages & DisadvantagesCharitable / Limited Company

Advantages Suitable for larger organisation with

assets (e.g. equipment, a building) and employs more than a few staff.

Can take on legal obligations and buy property in its own name.

The organisation responsible for any debts.

Funders regard this structure as more stable, as the company will continue to exist even if there is a change of people involved.

Increases your chances if applying for larger grants.

Some funders will only fund to registered charities.

Disadvantages Expensive to set up. Time consuming to run and annual

accountancy fees can be high. Regulated by both Companies House

and the Charity Commission. Have to notify of every change of

directors/trustees Draw up a particular form of annual

accounts and reports. SORP A Charitable Company cannot have

political or campaigning aims, but you can have educational ones.

Charitable Incorporated Organisation

A CIO registered and regulated by the Charity Commission. Requirements for reporting and for annual accounts should be simpler and cheaper, in particular for a smaller CIO. The Commission has produced model forms of constitution for CIO’s which will be simpler than the governing document of a Charitable Company.

Is straightforward to convert Charitable Company into a CIO and procedures to change the structure of unincorporated association into a CIO.

Legal Structures

Social Enterprise Community Interest Company Industrial and Provident Society (Co-

operatives) Partnership and Limited Liability Partnership Development Trusts and Social Firms

Community Interest Company

Introduced in 2007 as new corporate structure for non-charitable social economy enterprises that want to use their profits and assets for the public good.

The CIC may be a company limited by guarantee, a private company limited by shares or a public limited company limited by shares and is subject to company legislation.

One of key characteristics of a CIC is that is has an asset lock which ensures that the company retains its assets for the benefit of the community, as stated in the community interest statement.

Advantages and DisadvantagesCommunity Interest Company

Same advantages and disadvantages apply to a CIC as listed for a company.

As the CIC is not a charitable organisation, it doesn’t have the same restrictions on paying directors.

Directors of CIC’s can be paid therefore attractive to social entrepreneurs which benefits the community but also want to derive payment for their work.

Industrial and Provident Society (IPS)

An Industrial and Provident Society (IPS) is an incorporated organisation and its members benefit from limited liability.

There are 2 types of IPS: 1. Bona fide co-operative society and a 2. Society for the benefit of the community.

An IPS must register with the Mutual Societies Registration section of the Financial Services Authority, the regulatory body. In general regulation is lighter than for Limited Companies and the accounting requirements far less stiff.

Following the Co-operative and Community Benefit Societies and Credit Unions Act 2010, names of industrial and provident societies were changed as follows: Bona fide Co-operative Societies are now known as Co-operative Societies; Benefit of the Community Societies are now known as Community Benefit Societies.

Partnership and Limited Liability Partnership

A partnership is not generally considered to be a Social Enterprise, though social aims can be spelled out in the Agreement.

A Partnership Agreement is between two or more people and defines how the business will be run. But there is likely to be a problem if the business wants to apply for funding as it will be difficult to demonstrate any wider social involvement.

Partners can be self-employed or employees of the partnership and they are personally liable for debts.

There is also a form of Limited Liability Partnership (LLP) which is safer for the partners; they are not personally liable for any losses provided they have acted in a reasonable manner. An LLP requires you to register with Companies House and to publish annual accounts.

Development Trusts and Social Firms

These are two fairly common forms of Social Enterprise but neither is a legal structure in itself.

1. Development Trusts are set-up to bring about local regeneration and are often established as Limited Companies with a broad membership. They see their role as seeking "to move beyond provision of welfare services, by setting up enterprises (social businesses) encouraging self-help and reduce dependency."

2. Social Firms are businesses set up specifically to provide employment or training to disabled people, and are usually limited companies or co-operatives.

Useful contacts

Charity Commission Direct PO Box 1227

Liverpool L69 3UGTel: 0845 3000 218Minicom: 0845 3000 219Email: enquiries@charitycommission.gsi.gov.ukwww.charitycommission.gov.uk

Community Matters 12 - 20 Baron Street

London N1 9LLTel: 0207 783 7887www.communitymatters.org.uk

The Financial Services Authority - registration of Industrial & Provident Societies 25 The North Colonnade, Canary Wharf, London E14 5HS Helpline 0845 606 9966 www.fsa.gov.uk

Companies House Crown Way

Cardiff CF4 3UZTel: 0870 333 3636www.companieshouse.gov.uk

Clickdocs.co.uk Their website at Clickdocs.co.uk has information on

legal structures, together with model governing documents and application forms. They do charge for this service.

The CIC RegulatorCIC Team Room 3.68Companies HouseCrown Way Maindy

Cardiff CF14 3UZTel: 029 20346228. This is a 24-hour voicemail service.Email: cicregulator@companieshouse.gov.ukWebsite: www.cicregulator.gov.uk/