THE JMW GUIDE TO
CHOOSING THE RIGHT
STRUCTURE FOR YOUR
ORGANISATION
Keith Arrowsmith
April 2013
CONTENTS CONTENTS INTRODUCTION CHOOSING A STRUCTURE INCORPORATION CHARITIES SOCIAL ENTERPRISES DEVELOPMENT TRUSTS FEDERATIONS JOINT VENTURES EUROPEAN ECONOMIC INTEREST GROUPINGS OFFSHORE ORGANISATIONS COLLABORATIONS NAMING THE ORGANISATION SOLE TRADERS PARTNERSHIPS UNINCORPORATED ASSOCIATIONS TRUSTS LIMITED LIABILITY COMPANIES COMPANIES WITH A SHARE CAPITAL COMPANIES LIMITED BY GUARANTEE COMMUNITY INTEREST COMPANIES (CICs) OTHER TYPES OF COMPANY GROUP STRUCTURES LIMITED LIABILITY PARTNERSHIPS CHARITABLE INCORPORATED ORGANISATIONS INDUSTRIAL AND PROVIDENT SOCIETIES BENCOMS CO-­‐OPERATIVES COMPARING LEGAL STRUCTURES COMPARING LEGAL STRUCTURES COMPARING LEGAL STRUCTURES FURTHER INFORMATION NOTES 2
2 3 4 5 6 7 7 7 8 8 8 8 9 10 11 12 13 14 15 16 17 18 18 19 20 21 21 22 23 24 25 26 27 INTRODUCTION Thank you for picking up this JMW booklet. It is one of a series of
publications that we have produced to introduce our clients and contacts
to choices for different business and not for profit organisational
structures that apply in the UK. We hope that it provides you with some
relevant, simple to understand guidance to help answer your
organisation structure questions.
Chris Moss, Keith Arrowsmith and their teams provide legal services to
the commercial, not for profit, social enterprise and charity sectors.
Many people and existing organisations ask us for help to create and
govern their new structures, and also to sell, transfer and close down
their activities.
Our corporate and charity teams work closely with other lawyers who
specialise in employment, contract, branding or property law. The firm
can also provide advice for your personal needs. With nearly 200 staff,
we can offer a wide range of legal services. There are some times when
we can’t help, but we’ll always try and recommend other professionals
in those situations.
We think that important decisions should be based on information you
can rely on. We encourage you to take advice from a qualified,
experienced professional. Our firm is a member of a regulatory body
that sets out minimum standards for the service we provide. We take
confidentiality seriously, and our advice is backed by a professional
indemnity insurance policy.
We also think it is important that you feel that our lawyers understand
your organisation, and the problems you may face. Our lawyers give
presentations throughout the region, and we host many events at our
office in Manchester. We extend an open invitation to you and your
colleagues to attend, or if you prefer us to visit you, please let us know.
We don’t promise to be the cheapest source of advice, but we’ll always
be open and honest about our charges. Much of our advice is given for
a fixed fee, and we’ll do our best to suggest options that match your
budget.
3
CHOOSING A STRUCTURE To be able to choose the most appropriate legal structure for your
organisation, you first need to have an understanding of the different
options available to you. This guide sets out a brief summary of each
type of structure, and points out some of the common advantages and
disadvantages to help you decide which structure is best suited to your
needs.
This area of law is complex – you may be surprised at the number of
different types of structure to choose from. It is also changing. Recent
years have seen new rules for companies and charities, and the
invention of the Community Interest Company and the Limited Liability
Partnership. At the time of writing, another type of structure, the
Charitable Incorporated Organisation, is promised but not yet available.
The guide is based on the rules of England and Wales only. Scotland
has a different system, especially in relation to charity law. The guide is
only a summary, and it does not attempt to be comprehensive. We
strongly recommend that you obtain advice before deciding how to
proceed. Specifically, different structures are treated differently for tax
purposes, and although the choice of structure should not be solely
based on the current tax regime (which is liable to change), it will
naturally be one of the many factors to consider.
The choice of structure will also dictate the registration and reporting
requirements that will apply, and the level of personal liability if the
organisation fails.
This guide starts by explaining some of the general principles that apply
to organisational structures, and then it sets out examples of the most
popular choices. This guide does not cover the more specialist
structures (such as government, educational, financial and
ecclesiastical bodies). If you need legal advice on any of the points
raised by the guide, or have any general comments on its contents, you
are very welcome to contact us (details on the back cover).
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INCORPORATION The simplest forms of structure can be created with little formality.
These are known as UNINCORPORATED bodies. They include sole
traders, clubs, trusts and partnerships. These bodies are created
informally, with no registration process.
Some types of bodies only begin to exist if a registration (or
INCORPORATION) process is followed. These include limited liability
partnerships and companies.
Some words have a general meaning in everyday speech, but have a
specific meaning at law. A “society” for example is normally an
unincorporated association (or club) formed informally by liked minded
people with a common aim. However there are some specific types of
organisation known as Industrial and Provident Societies that are
incorporated, and created by following a formal procedure. A “Society”
could have either of these structures, and therefore some words have to
be used with caution to avoid confusion.
Sometimes it is difficult to tell the difference just by looking at the name
of the body. The “ABC theatre company” might be a club or society, or it
could be a not for profit incorporated limited liability company. If you are
checking the structure of a body, it should be fairly simple to find out
whether it is incorporated. All organisations must specify their full legal
name (but may also use an informal or trading name). Incorporated
organisations are listed by their registration authority, and are given a
registration number that remains constant, however many times their
legal name changes.
Some types of structure can seem to exist as either an incorporated or
an unincorporated structure. A partnership is an unincorporated
business vehicle, but a Limited Liability Partnership is an incorporated
business vehicle governed by different rules, despite a similar sounding
name.
Incorporated companies and limited liability partnerships are registered
at Companies House. Industrial and Provident societies (including
Credit Unions) are registered at the Financial Services Authority.
Community Interest Companies are registered at Companies House but
also have a separate CIC regulator.
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CHARITIES A charitable organisation can take one of a number of different
structures, but they all have the following in common:
• Not for profit;
• Exclusively charitable objects; and
• Operate for the public benefit.
A charitable organisation whose gross annual income exceeds £5,000
must normally register (there are some limited exemptions) with the
Charity Commission. This is in addition to any separate registration
process for a charity to become a not for profit limited liability company.
Some charities are therefore subject to company law and charity law,
and are subject to dual registration. The Charity Commissioners publish
some details of the charity’s trustees online, as well as details about the
performance of each charity. This level of transparency is seen to give
donors confidence in the charity sector. In return, charities can benefit
from:
• Tax reliefs;
• Access to funding;
• Public recognition and support.
Currently a charity can take one of four structures (not counting the
special rules for some religious, educational or national organisations
such as the Girl Guides):
• Charitable trusts;
• Unincorporated associations;
• Companies limited by guarantee
• Charitable Incorporated Organisations (CIOs)
The last structure is relatively new (introduced in December 2012).
Those that have responsibility for the day to day management of the
charity (the trustees) must always act in the best interest of the charity,
and avoid conflicts. This normally means that the majority of trustees
cannot be paid for their work, but they are able to be paid for any
additional goods and services they provide to the charity, subject to very
tight controls.
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SOCIAL ENTERPRISES There is no legal definition of “social enterprise” but it is a phrase
commonly used to describe a business that trades with a social
purpose. It is not defined by a specific legal structure but by its social
aims and outcomes, and the way that it uses its profits from its trading
activities.
Its legal form can be chosen to protect its social mission by imbedding
its objective in its structure. There will be a balance between choosing a
very tight structure, with choosing one that is sufficiently flexible to allow
the social enterprise to take advantage of future business opportunities.
Some social enterprises wish to limit the risk of personal liability for their
members, and therefore chose an incorporated structure, which may be
a limited liability company, a Community Interest Company, or one of
the other co-operative type structures discussed below. Care must be
taken because some funders are only prepared to deal with only some
types of social enterprise. Social enterprises do not have charitable
exemptions from tax, but may be able to access some discretionary
reliefs (for example, partial relief from business rates).
A social enterprise may be part of a charitable structure, whereby a
charity owns an interest in a social enterprise, perhaps as its trading
arm.
DEVELOPMENT TRUSTS A development trust is owned by the community it seeks to serve, and
retains any surpluses for its own use. A development trust can provide a
central point for the regeneration of its local community. There is no
standard legal format. Some register as a company limited by
guarantee, some are industrial and provident societies. Some are
charitable.
FEDERATIONS A federation is any society or organisation formed from separate groups
or bodies. Each member group retains its own identity, but also agrees,
by agreeing to become a member of the federation, to accept a level of
central control.
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JOINT VENTURES There is no legal definition of a “joint venture”, but it is a phrase that is
commonly used to describe the close working relationship between two
or more organisations. Joint ventures sometimes take an informal
structure, governed only by legally binding agreements. Sometimes,
especially if the work of the joint venture is international or longer term,
it may be better for each participant to become a joint owner of a
specially created company or limited liability partnership (often known
as a special purpose vehicle or SPV).
EUROPEAN ECONOMIC INTEREST GROUPINGS A European Economic Interest Grouping (EEIG) is an association of
businesses and/or individuals from different European Union countries
who operate together across national borders. An EEIG is registered in
one EU country, where it has its official address, and if its central
administration is in the UK, it must also register with Companies House.
OFFSHORE ORGANISATIONS If an organisation is subject to the rules and regulations of another
jurisdiction, it is often referred to being “offshore”. This is often the case
for commercial entities that have chosen a tax friendly country.
COLLABORATIONS There is no legal definition of a “collaboration” but it is a word commonly
used to describe a project where a number of organisations that have
agreed to work together to achieve a shared aim. Most collaborations
are informal, and are governed by the promises made between the
members of the collaboration. It is best practice to set out the terms of
the collaboration in a formal scoping document. Some funders insist on
entering into grant agreement with a “lead party”, who accepts all
liabilities and obligations in return for promises of contributions from the
other members.
For larger scale or longer term collaborations, a “hub and spoke”
structure may be more appropriate, whereby the members jointly own
an incorporated organisation which contracts on behalf of all members.
8
NAMING THE ORGANISATION Reputation will be one of the most important assets of the organisation.
Before spending time and money in developing a corporate identity, it is
worth researching the market place to make sure no one else is using
the same or a similar name as the intended name of the new
organisation.
It is possible to access data at Companies House, the UK Intellectual
Property Office, the Charity Commission and other commercial
databases that list other business names. JMW can perform on-line
searches and obtain press cuttings on a one off or regular basis to
check the market place. The new organisation could be subject to a
passing off claim if a name is chosen that is the same as (or similar to)
an existing organisation in an attempt to benefit from that organisation’s
existing goodwill.
Some words are controlled (for example “Institute”, “Sheffield”) and
cannot be used without special permission. The use of “limited” or “Ltd”
or “plc” is required for all limited liability companies unless the company
is not for profit, applies for an exemption, and fulfils the company law
regulations.
A corporate structure registers its name at Companies House, and
charities apply to the Charity Commission. There is no formal central
record of sole traders and unincorporated partnerships. A business
must have a formal corporate name, but can also have a less formal
trading name. Names can be changed, but an incorporated body will
keep its registration number throughout its life.
The latest regulations require the organisation to publish its full
corporate name, contact details, company registration and VAT
registration numbers on all forms of written business communication –
including emails and websites.
Trading Standards officers enforce rules to help reduce the risk of
consumers being confused, and some international schemes, including
the CE mark, carry disclosure requirements.
It would be wise to check the availability of domain names and social
media accounts whilst considering any new name.
9
SOLE TRADERS Sole traders are individuals who are in business. Their business is
unincorporated, which means that the business has no separate legal
identity of its own. All the risks of and liabilities involved in running a
sole trader business are borne by the individual. This means that all
assets are held in the name of the sole trader, and the sole trader
enters into all contracts personally.
There is no distinction between the sole trader’s business assets, and
personal assets. All are at stake if the business fails.
A sole trader is able to set up in business with the minimum of
regulation. There is no requirement for a constitution (or governing
document) or any form of registration (other than to inform the tax
authorities). Sole traders can trade under an informal or business name,
but their true identity must always be clear.
By definition, a sole trader cannot be a charity or a social enterprise.
Two or more people cannot become one sole trader (see partnership
below as an alternative).
ADVANTAGES:
- Light touch regulation (other than tax and VAT registrations);
- Possible tax advantages (tax is paid in arrears);
- Losses in one year can be offset against tax paid in other years;
- Simple business structure for one person.
DISADVANTAGES:
- Sole traders are personally liable for all debts and obligations of their
business;
- Sole traders must hold all assets and contracts in their own names;
- Some funders are reluctant to support sole traders because of the lack
of formal structure and regulation.
10
PARTNERSHIPS “Partnership” is a word that is used in everyday language to describe
many different types of relationship. For business law, a partnership is
an unincorporated body, defined specifically as “the relationship that
exists between persons carrying on a business in common with a view
to making a profit.” The partners who form the partnership own the
business, manage the organisation, and keep an equal proportion of the
profits (unless some other split is agreed). A partnership can have a
trading name, but the true identity of all the partners must be revealed.
There is no requirement for a constitution or registration (other than with
the tax authorities). A partnership is often internally governed by a
partnership agreement and, to the extent to which it is not, the standard
provisions set out in the Partnership Act (from 1890) will apply.
The default standard rules will assume that the partners will share all
profits and liabilities equally, and that if any partner chooses to leave,
the partnership must terminate. It is relatively easy to adopt a governing
document that is tailored to the needs of the partners that sets out how
partners join the partnership, how it is managed, how the profits and
losses are allocated, and how a partner leaves.
These types of partnerships are not the same as Limited Partnerships
and Limited Liability Partnerships, despite their names being similar.
By definition, partnerships cannot be sole traders or charities or social
enterprises. A partner can be a person or another body.
ADVANTAGES:
- Light touch regulation
- Some possible tax advantages (payment in arrears);
- Losses set against tax paid in previous years.
DISADVANTAGES:
- Partners are all personally liable for all debts and obligations of the
business;
- All assets and contracts are held by a partner for the partnership.
11
UNINCORPORATED ASSOCIATIONS An unincorporated association is a membership organisation, often a
club or society. They usually have a written constitution that sets out the
rules that govern the association. The rule book can set out how
members join the association; how they are removed; any membership
fee structure, and how the members can elect a committee to run the
society on their behalf.
Therefore by definition, these types of organisation consist of two tiers –
the general membership and the elected committee who have
responsibility for the day to day activities. Typically, a society will
appoint a chair, secretary and treasurer as part of the committee
structure.
Unincorporated associations may be charitable. If a society’s objects
are wholly charitable, and it has an annual income over £5000, it must
register with the Charity Commission.
Associations are not able to limit the liability of its members or its
management committee. Although the rule book might set out a
mechanism for the committee to recover a contribution from the
members, there are situations where the committee and / or the
members may become fully responsible for the debts and liabilities of
their society.
ADVANTAGES:
- The association can prepare its own constitution;
- Light touch regulation (unless a charity);
- No administrative burden (unless a charity);
- Quick and cheap to run;
- Quick and cheap to terminate.
DISADVANTAGES:
- Committee Members may be held personally liable for debts and
liabilities;
- In some cases, the members may be liable for debts and liabilities;
- The association cannot hold assets or contracts in its own name;
- Some funders will not deal with unincorporated associations.
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TRUSTS A trust is a mechanism for one party to transfer an asset (often money
or property) to a group of trustees for a defined purpose (which can
benefit a specific family, community, sector or a charitable purpose). It
allows trustees to manage assets for others.
The trust is governed by a trust deed. The deed is a declaration that the
initial money or property is to be held separately from the trustee’s own
personal assets, and grants the trustees the power to deal with that
money and property (and any subsequent money and property). It also
normally includes rules for the appointment and retirement of trustees,
and how decisions will be made.
Trusts have beneficiaries (those who benefit from the trust) but they do
not have a separate membership structure. Trustees hold assets and
enter contracts in their own names. They must be very careful they do
not create a conflict between their personal interests, and the interests
of the beneficiaries.
Trusts are often used in tax planning, especially when creating family
trusts. In this context, for the trust to be legally enforceable, the reason
(or purpose) for the creation of the trust must be charitable. Details of
the trustees and the activities of the trust are therefore made public by
the Charity Commission.
A trust is unincorporated, and therefore the trustees have unlimited
personal liability for the debts and obligations of the trust.
ADVANTAGES:
- quick and cheap to set up (although some technical requirements to
make sure the trust is valid);
- small trusts are cheap to administer;
- Charity Commission consent required;
DISADVANTAGES:
- no membership structure;
- all assets and contracts held in the name of the trustees;
- trustees are personally liable for all trust debts and obligations.
13
LIMITED LIABILITY COMPANIES Limited liability companies are legal entities in their own right. This
means that a company is responsible for its obligations and liabilities.
The company can enter into contracts and hold assets in its own name.
However, the incorporation process is regulated and requires a level of
disclosure.
There is such a thing as an unlimited company, but these are rare.
Limited companies have a two tier structure, with a general membership
who appoint director(s) to take responsibility for the day to day activities
of the company. The directors and the members can be the same
people. Until fairly recently, all companies also needed a company
secretary who was responsible for meeting the public filing
requirements, but this position is now voluntary. It is possible to have a
“one person” company who is the sole shareholder and director. It is
also possible for one company to have a stake in another company.
Directors must be at least 16 years of age. They have statutory
responsibilities to always act in the best interests of their company.
All limited companies must register (become incorporated) at
Companies House. The process is fairly quick (and can be completed
online). They all file annual accounts, which, may need to be audited
(depending on the size of the company). They all also file an annual
return, bringing the public details of the company and its officers up to
date.
Limited companies are “limited” because, if a company fails, then the
members’ losses are limited to their stake in the company. The
directors’ personal assets are also protected as long as they have not
breached any rules.
Private limited companies use “limited” or “ltd” at the end of their name
(or the welsh equivalent). Public limited companies use “plc”, and are
subject to a higher level of scrutiny because they can raise money by
selling shares to the general public, sometimes being traded on a stock
exchange.
14
COMPANIES WITH A SHARE CAPITAL The liability of a member of a company can be defined in two ways. If
members want to make an investment in the company, then the
company must incorporate with a share structure. Each member buys
at least one share, and the company uses that investment to develop its
business.
In return, the member knows that, even if the company fails, his or her
other assets are safe. A company may grant a shareholder the right to
vote, the right to receive a proportion of its profits (in the form of
dividends), and the possibility that the shares could, at some time in the
future, be sold for a profit.
Companies can raise finance from shareholders, or by retaining profits,
or by entering into loan agreements. Some social enterprises may also
take this form.
Companies have a governing document known as the articles of
association. Older companies set out their purpose and powers
(objects) in a memorandum of association. The directors must make
sure that the activities of the company comply with the articles,
company law and insolvency law.
ADVANTAGES:
- A company can own property and enter into contracts. Any litigation
will be in the name of the company;
- Members are only liable for the amount of their share capital;
- In most cases, directors are protected from personal liability;
- The company structure is long standing, well understood, and its
powers and processes for decision making are clear;
- The regulation and disclosure requirements for companies may
increase public confidence in a company;
DISADVANTAGES:
- Set up and management are subject to regulation and control by
Companies House;
- Companies are subject to on-going disclosure and administration
requirements.
15
COMPANIES LIMITED BY GUARANTEE If members do not want to make an investment in a company, but rather
want to operate in the not for profit sector, a company that is limited by
guarantee should be incorporated.
Here, each member guarantees the debts of the company, up to a cap
set out in the governing document. The cap for the guarantee is usually
a nominal £1 or £10. The member knows that, even if the company fails,
his or her other assets are safe. A company may allow a member the
right to vote, but surpluses are normally kept for future projects.
Membership is normally non-transferable.
Because of profits are not distributed, funders are more likely to make
grants to companies limited by guarantee. If all of the objects of a
company limited by guarantee are charitable, then it is likely that the
company will need to also register with the Charity Commission.
Companies have a governing document known as the articles of
association. Older companies set out their purpose and powers
(objects) in a memorandum of association. The directors must make
sure that the activities of the company comply with the articles,
company law and insolvency law.
ADVANTAGES:
- A company can own property and enter into contracts. Any litigation
will be in the name of the company;
- Members are only liable for the amount of the guarantee;
- In most cases, directors are protected from personal liability;
- The company structure is long standing, well understood, and its
powers and processes for decision making are clear;
- The regulation and disclosure requirements for companies may
increase public confidence in a company;
DISADVANTAGES:
- Set up and management are subject to regulation and control by
Companies House;
- Companies are subject to on-going disclosure and administration
requirements.
16
COMMUNITY INTEREST COMPANIES (CICs) A CIC is an incorporated limited company, taking the form of a
company limited by shares or by guarantee. It therefore has all the
advantages of a limited company. A CIC has an additional special level
of control, which helps if the organisation wants to guarantee that its
profits will be used for the community.
At formation, and for as long as the company is a CIC, it must satisfy an
extra level of scrutiny. In summary, this means that the CIC’s activities
must be for the benefit of the community. To protect this social aim, the
CIC’s assets and profits are subject to restrictions.
This type of company is subject to the standard company regulations,
and the additional CIC regulations, enforced by the CIC Regulator. This
structure is not suitable for charities (since CICs aim to make profits
(albeit for the benefit of the community)), nor for those who have a
political purpose.
CICs have articles of association as their governing document, and the
CIC regulator publishes model documents for review.
ADVANTAGES:
- A CIC can own property and enter into contracts. Any litigation will be
in the name of the CIC;
- Members are only liable for their nominal share value or the
guarantee;
- In most cases, directors are protected from personal liability;
DISADVANTAGES:
- Set up and management are subject to regulation and control by
Companies House AND the CIC regulator;
- CICs must comply with disclosure and administration rules
- CICs cannot be charitable, and will be taxed like any other commercial
body.
- Some funders will not fund this type of organisation.
17
OTHER TYPES OF COMPANY The Company has proved to be a useful model, and has been adapted
for some specific circumstances.
There are some “unlimited” companies, where the shareholders are
liable for all of the liabilities of the company. This is useful if the
company structure is required, but the members are happy to guarantee
the obligations of their organisation.
A “right to manage” company (RTM) is run by leaseholders who have
agreed to manage a property, and deal with repairs and maintenance.
RTM companies have limited powers that are associated with those
property management functions, and must be private companies limited
by guarantee.
A Societas Europaea (SE) is a trans-European company. By its nature,
they tend to be large scale. In the UK, an SE must also be a public
limited company.
Banks, building societies and credit unions are incorporated bodies but
subject to specific regulation by the Financial Services Authority.
GROUP STRUCTURES Sometimes it is not enough just to have one organisation. It is possible
for one organisation to own or have a partial stake in another
organisation. A company is known as a subsidiary of another company
(its “parent” or “holding” company) if that parent company holds the
majority of the voting rights in it, or it has the right to appoint or remove
a majority of its board of directors. A company is a wholly owned
subsidiary of another company if it has no members except the parent
company.
This group structure is useful to allow a charity to own a separate
trading entity, whose object will be to undertake commercial activities
with all profits paid by way of donation or dividend to the parent charity.
18
LIMITED LIABILITY PARTNERSHIPS In addition to the unincorporated partnership structure, there are two
types of limited liability partnership, with similar sounding names.
A limited partnership registers with Companies House, but is not subject
to the regime of annual returns and the filing of accounts. This structure
provides a hybrid allowing “ordinary” partners who (like partners in
unincorporated partnerships) are jointly liable for any debts owned by
the partnership, and “limited partners” who enjoy limited liability. A
limited partner’s liability is limited to the amount of money invested in
the business. Limited partners are “sleeping” partners, and take no
active roles in the limited partnership.
In contrast, a Limited Liability Partnership (LLP) has a structure that is
incorporated and registered with Companies House. An LLP has a
governing document known as an LLP Agreement, and is obliged to
make annual returns and file accounts. All members of the partnership
(confusingly known as members rather than partners) enjoy limited
liability (normally capped at the amount invested in the business).
LLPs therefore have a separate legal identity, but no requirement of
separation between member/investor and director/manager. It can own
assets and enter into contracts in its own name. It is granted the
flexibility and tax position akin to unlimited partnership, but the benefits
of limited liability. All partnerships need two or more partners, with a
view to making a profit. A partnership can be tailored to reflect a social
purpose, but cannot be charitable.
In all cases, the partners are best served by entering into a partnership
agreement so that the decision making processes are clear, especially
in relation to the appointment of new partners, and the winding up of a
partnership.
19
CHARITABLE INCORPORATED ORGANISATIONS This is a new style structure for charities that was introduced in England
and Wales in December 2012.
A CIO will only be for charities, and is designed to replace the charitable
company limited by guarantee structure. Some people believe that the
charitable company structure is subject to too much red tape, being
subject to control by Companies House and the Charity Commission.
The Charity Commission has published two model governing
documents, one designed for an organisation where the members are
the same as the directors (the Foundation Model), and one designed to
have a wider membership (the Association Model). These model
documents are different to those published for companies limited by
guarantee – and include (by default) an obligation on members to
always act in the best interest of the CIO.
Both models offer the benefits of incorporation – so that the assets (and
liabilities of the organisation) are separate from those of its members.
Neither allow registration at Companies House (since although they
may behave like companies, they are not subject to the Companies
Act). This also means that mortgages and charges that a company may
grant as security to lenders (and record on the Company House public
register) can be granted by CIOs but there is no equivalent public
register.
It was also intended that all charitable companies would eventually be
required to become a CIO, but no formal timetable for compulsory
transfer has been published. It is expected that it will be relatively easy
for existing charitable companies and CICs to become CIOs.
The Charity Commission will regulate CIOs. The managing board
(known as directors for charitable companies) will be known as charity
trustees, and the membership will benefit from limited liability. CIOs, like
other charities, must operate for the public benefit.
Applications to create CIOs in England and Wales are dealt with by the
Charity Commission. It is likely that the Charity Commission will take
longer to deal with registration of a CIO than Companies House will take
to incorporate a charitable company limited by guarantee.
20
INDUSTRIAL AND PROVIDENT SOCIETIES The Industrial and Provident Society movement has become less
popular in recent times, but these organisations were designed to
enable workers to have a closer relationship with the management of
their organisation. They are now subject to regulation by the Financial
Services Authority. To qualify for registration, an IPS must have at least
three members, it must carry on an industry, business or trade, and
either be a society for the benefit of the community (CBS or BenCom) or
a co-operative society or a friendly society.
Once registered, the IPS becomes incorporated, and will have a
separate legal identity, and will be able to hold assets and enter
contracts in its own name.
Credit Unions are special types of IPS.
It is no longer possible to register as a Friendly Society.
BENCOMS A Community Benefit Society conducts business for the benefit of its
community. Profits are not distributed to members, but to the
community. A BenCom will have social objectives that are met by
trading, and will be managed by its members. A BenCom can have a
share structure to raise funds from the public. It can also have charitable
objects (if the community benefit is also for the public benefit). However,
charitable BenComs are not regulated by the Charity Commission.
Instead they are referred to as “exempt” charities, and report solely to
the Financial Services Authority.
Registration of new BenComs is discouraged – the legislation requires
new BenComs to have some special reason for seeking registration as
a society rather than a company. This is normally achieved by showing
that the organisation is seeking a constitution that has an asset lock,
with the business being conducted for the community, and subscribing
to the “one member, one vote” principle.
Many funders do not understand BenComs, and the lack of a charity
commission registration is sometimes an issue.
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CO-­‐OPERATIVES Co-Operatives are associations that are formed to meet a common
economic, social or cultural need, that have a jointly owned “one
member, one vote” structure. Co-Operatives have a choice of legal
structure, one of which is the Co-Op Industrial and Provident Society.
The Co-Op ethos can also apply to companies limited by guarantee, if
their objects and articles are carefully drafted. Either way, the aim is to
conduct business for the members’ mutual benefit.
An IPS Co-Op can be a social enterprise, depending on its activities,
and how profits are distributed, and Co-Ops can be charities in very
limited circumstances (for example, where all members are within a
class of charitable beneficiary). An IPS Co-Op is regulated by the FSA.
Co-Ops can return value to their members (often in the form of a
dividend), and sometimes in the form of interest on the share capital
invested.
ADVANTAGES:
- An IPS can own property and enter into contracts. Any litigation will be
in the name of the IPS;
- Members are only liable for their nominal share value or the
guarantee;
- In most cases, the managing committee are protected from personal
liability.
DISADVANTAGES:
- Set up and management are subject to regulation and control by the
FSA, and registration is difficult;
- IPS must comply with disclosure and administration rules;
- An IPS cannot be a registered charity;
- Some funders do not understand the IPS movement.
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COMPARING LEGAL STRUCTURES Sole
trader
Partnership
Unincorporated
association
Charitable
trust
Incorporated
with separate
legal identity?
No
No
No
No
Limited liability
for members?
No
No
No
No
Limited liability
for directors/
committee?
No
No
No
No
Constitutional
document?
None
Can have a
partnership
agreement
or the
Partnership
Act applies
Constitution/
rules
Deed of
trust/trust
deed/
declaration
of trust
Option to apply
for Charitable
status?
No
No
Yes
Yes
Regulator?
None
None
Charity
Commission if it
has charitable
status
Charity
Commission
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COMPARING LEGAL STRUCTURES Company
(Shares)
Company
(Guarantee)
CIC
LLP
Incorporated
with separate
legal identity?
Yes
Yes
Yes
Yes
Limited liability
for members?
Yes
Yes
Yes
Yes
Limited liability
for directors/
committee?
Possible
Possible
Possible
Possible
Constitutional
document?
Memo and
articles
Memo and
articles
Memo and
articles
Partnership
deed
Option to apply
for Charitable
status?
No
Yes
No
No
Regulator?
Companies
House
Companies
House and
Charity
Commission
if it has
charitable
status
Companies
House and
CIC
Regulator
Companies
House
24
COMPARING LEGAL STRUCTURES CIO
IPS Bencom
IPS
Co-operative
Incorporated
with separate
legal identity?
Yes
Yes
Yes
Limited liability
for members?
Yes
Yes
Yes
Limited liability
for directors/
committee?
Possible
Possible
Possible
Constitutional
document?
Memo and
Articles
Rules
Rules
Option to apply
for Charitable
status?
Compulsory (but
not available
other than in
Scotland)
No
No
Regulator?
Charity
Commission
FSA
FSA
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FURTHER INFORMATION www.charity-commission.gov.uk
www.companies-house.gov.uk
www.cicregulator.gov.uk
www.fsa.gov.uk
www.uk.coop
www.jmw.co.uk
26
NOTES 27
Keith Arrowsmith is a partner at JMW Solicitors, Manchester. He has
over 20 years’ experience of helping clients in the not for profit and
charitable sector.
Keith’s guide provides a general introduction to different types of
organisational structures available in the commercial and the not for
profit sectors.
This guide is based on the rules and regulations that apply at the time of
publication in England and Wales. It does not constitute legal advice.
With thanks to Kate Wagstaffe.
JMW Solicitors LLP is a limited liability partnership registered in England
and Wales under registration number OC338958.
Authorised and Regulated (under SRA number 508380) by the
Solicitors Regulation Authority.
© 2012. All rights reserved.
“JMW” is a registered trade mark.
Version 1.2 – April 2013.
www.jmw.co.uk
JMW Solicitors LLP
1 Byrom Place
Manchester
M3 3HG
and at MediaCityUK, Salford Quays.
[email protected]
Telephone: 0161 828 8338
28