Information sheet

Legal structures for voluntary and community groups

Last update June 2011

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Legal structures for voluntary and community groups

Charitable organisations, voluntary associations and social enterprises in England have a choice about the type of legal structure they adopt. Each type has its advantages and disadvantages. This information sheet describes the different types to help you decide which is most suitable for you organisation. In the eyes of the law, an organisation is either:

A collection of individuals working together, such as an unincorporated organisation or charitable trust

or

A corporate body with a separate existence from the individuals belonging to it, such as a limited company or a charitable incorporated organisation.

Charitable status Some, but not all of the structures covered in this information sheet can register as a charity. For more information on how to register with the charity commission, see our information sheet on How to become a registered charity. Choosing and preparing a governing document The governing documents most commonly used for voluntary and community organisations are:

constitutions (for unincorporated associations) memorandum and articles of association (for companies) rules (for Industrial and Provident Societies)

Main features The following table lists the main features of the main structures available to community groups, voluntary organisations and social enterprises.

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Legal structures
Legal structure Summary: most typical features Ownership, governance and constitution Is it a legal person distinct from those who own &/or run it? No - can create problems for contracts, holding property and liability of members No - trustees personally liable Can it be a charity and get charitable status tax benefits? Yes - if it meets the criteria for being a charity

Unincorporated association

Informal - no general regulation of this structure, need to make own rules

Nobody owns governed according to own rules

Trust

A way of holding assets so as to separate legal ownership from economic interest Most frequently adopted corporate legal structure, can be adapted to suit most purposes

Assets owned by trustees and managed in interests of beneficiaries Directors manage business on behalf of members. Considerable flexibility over internal rules As for other limited companies, but subject to additional regulation to ensure community benefits Committee / officers manage on behalf of members. One member, one vote (regardless of e.g. sizes of respective shareholdings) Like Co-op type, but new legislation provides option of more secure form of asset lock Similar to company but with different terminology (e.g. for directors read charity trustees)

Yes - if it meets the criteria for being a charity

Company limited by guarantee (other than Community Interest Company) Community interest company (CIC)

Yes - members liability limited to amount unpaid on shares or by guarantee (usually 1) Yes - members liability limited to amount unpaid on shares or by guarantee (usually 1) Yes - members liability limited to amount unpaid on shares

Yes - if it meets the criteria for being a charity

Limited company structure for social enterprise with asset lock and focus on community benefit For bona fide cooperatives that serve members interests by trading or supplying

No

Industrial & Provident Society (IPS) (Co-operative)

No

Industrial & Provident Society (IPS) (Community Benefit Society) Charitable Incorporated Organisation (CIO)

Benefit the community other than just own members

Yes - members liability limited to amount unpaid on shares

Yes - exempt charity status

Expected 2011 Corporate structure designed for charities

Yes - members either have no liability or limited liability

Yes - must be a charity and must meet the criteria

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Unincorporated Association This is the most common structure used by community and voluntary organisations. It is easy and quick to set up and there is no need for any external approval or regulation. However, if the group has charitable aims and an annual income above 5,000, then it is required to register with the Charity Commission. Unincorporated Associations have a membership of individuals or other organisations, or a combination of the two. An associations governing document is usually referred to as a constitution. You can use the charity commission model constitutions GD3 or GD4. These models are available on the Charity Commissions website at www.charitycommission.gov.uk/Start_up_a_charity/Guidance_on_registering/mgds.aspx Some advantages of an unincorporated association: Simple and flexible to set up with limited external regulation (however could be subject to Health & Safety, Charity Commission, HM Revenue & Customs etc. depending upon the activity undertaken). No need to submit accounts to anyone externally unless funders require it or if registered as a charity. However, accounts still need to be prepared. Ideal for small groups who do not intend to employ staff, or buy property.

Some disadvantages of an unincorporated association: Has no separate legal existence it is a collection of individuals which means that contracts, funding agreements etc. may be difficult to sign up to. It cannot own property in its own right individual management committee members have to do this on behalf of the group. Individual management committee members are personally responsible for the groups obligations and debts and can be held liable, for example, if the organisation is taken to court.

Trust A Trust is a special sort of unincorporated association, usually set up to manage money or property. A Trust can register with the Charity Commission if it qualifies for charitable status. It is run by a 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. Trustees must not receive any remuneration from the Trust or any personal benefit from its activities. A Charitable Trust is a legal form which is set up by means of a governing document called a trust deed. This structure is not

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generally suitable for most groups. It is traditionally used by grant-giving charitable trusts. The Charity Commission produce a Model Trust Deed (GD2) which you can download from their website at http://www.charitycommission.gov.uk/Start_up_a_charity/Guidance_on_registering/mgds.aspx Company limited by guarantee A company limited by guarantee does not have shares or shareholders, and cannot distribute profits. Instead it has members, who may pay a subscription and are each liable for a limited sum, usually 1 (the guarantee) if the company is wound up. The members elect a board, or committee (the Directors), and can remove them but the board has day to day control. As an incorporated organisation (a company) it means it has a legal identity separate from its members and can, for example, own property and enter into contracts in its own name. It can also give more protection from personal liability to company directors. This structure is usually appropriate for organisations that employ staff, own or lease property and enter into contractual agreements. The governing document is referred to as Memorandum and Articles of Association. Some advantages of a Company limited by guarantee: Ability to enter into contracts, accept grants, borrow money, insure risks, own and manage property, vehicles etc. Individual members have limited liability. However, directors do have a legal duty to act prudently and ensure the company manages its finances carefully. Suitable for larger organisations which own a building or other assets, or employs staff.

Some disadvantages of a Company limited by guarantee: More time consuming to run and regulated by Companies House which includes sending them the companys annual reports and accounts. More controls and regulations. Annual accountancy and other professional fees can be expensive.

A company which intends to register as a charity may want to adopt the Model Memorandum and Articles of Association produced by the Charity Commission. You can download this document (GD1) from their website at http://www.charitycommission.gov.uk/Start_up_a_charity/Guidance_on_registering/mgds.aspx

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Community Interest Company (CIC) An increasingly popular choice of structure for social enterprises and has been specially designed for them. The CIC is a limited company with special features to ensure it works for the benefit of the community. A particular feature of the CIC is that the assets and profits are committed permanently to the community it benefits through what is called an asset lock. CICs report to the Regulator of Community Interest Companies. The Regulator also manages registration and provides guidance to groups interested in this structure. The CIC Regulators website has a comprehensive Information Pack covering all aspects of setting up a CIC. The governing document for a company is called the memorandum and articles. Model Memorandum and Articles of Association for a CIC can be downloaded from the CIC regulators site at http://www.cicregulator.gov.uk/memArt.shtml Industrial and Provident Society (IPS) An IPS is a corporate body registered under the Industrial and Provident Societies Acts. The governing document is called the rules. IPSs are regulated by the Financial Services Authority. There are two types of IPS: 1. Bona fide co-operative The IPS co-operative is mainly used by consumer co-operative, housing co-operatives and credit unions. Its basic characteristics are: One member on vote Return on capital must be limited If profits are to be shared out among the members, this must be done using an equitable formula No artificial restrictions on membership 2. Community benefit society The IPS society for the benefit of the community form is common among housing associations and other forms of voluntary and community sector activity and can be appropriate for democratic, non-profit-distributing organisations. Its characteristics are similar to those of a co-operative, but includes a requirement to primarily benefit people other than its members. /opt/scribd/conversion/tmp/scratch14117/66525023.doc

Charitable Incorporated Organisation (CIO) The CIO is a new form of incorporated structure for charities. It will enable a single registration process for charities. Currently, a charity wishing to incorporate needs to register with both Companies House and the Charity Commission. The CIO will give a charity the main advantages of a Charitable Company but it will be registered with and regulated by the Charity Commission only. Requirements for reporting and for annual accounts should be simpler and cheaper. It is expected that the new structure of will be available to charities in Autumn 2011. Further information is available on the Charity Commission website see Charitable Incorporated Organisation (CIO).

Getting Help from regulators

Charity Commission Charity Commission Direct PO Box 1227 Liverpool L69 3UG Telephone: 0845 3000 218 www.charity-commission.gov.uk Community Interest Company Regulator CIC Team, Room 3.6 Companies House Crown Way Cardiff CF14 3UZ Telephone: 029 20346228 Email: cicregulator@companieshouse.gov.uk www.cicregulator.gov.uk Companies House Crown Way Cardiff CF14 3UZ Telephone: 0870 3333636 www.companieshouse.gov.uk Financial Services Authority 25 The North Colonnade Canary Wharf London E14 5HS Telephone: 020 7066 1000 http://www.fsa.gov.uk/pages/index.shtml

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Getting help from infrastructure support agencies

Cooperatives UK Holyoake House, Hanover Street Manchester M60 0AS Telephone: 0161 246 2900 http://www.uk.coop/ Nottingham Community and Voluntary Service 7 Mansfield Road Nottingham NG1 3FB Telephone: 0115 934 9548 Email: helpdesk@nottinghamcvs.co.uk www.nottinghamcvs.co.uk Social Enterprise East Midlands Suite 28, Minerva House Spaniel Row Nottingham NG1 6EP Telephone: 0115 871 4760 Email: info@seem.uk.net www.seem.uk.net

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