Legal structures

There are a number of options available to communities in terms of legal structure. It is an important decision to make as it can restrict what your organisation can achieve if you chose the wrong one.

A legal structure is, quite simply, a formal method of organising a project so that it is acceptable in law. Different structures will determine the corporate status, governing document or constitution, your governing body, management structure, membership and how you will deal with any profit from your enterprise. There are several types of legal form available:

• Association

• Trust

• Partnership

• Company limited by guarantee and company limited by shares

• Industrial and provident society

• Limited liability partnership

• Community interest company (CIC) limited by guarantee and community interest company (CIC) limited by shares

• Charitable incorporated organisation (NB this is scheduled to be available in mid to late 2009)

Which form is appropriate for your organisation?

When considering which legal structure is most suitable for you, it is important to first work out what your aims and purpose and objectives are, what you want to do, how you want to do it, do a business plan and then choose a structure that is suitable for you, i.e. structure follows strategy, not the other way round.

First of all, you need to decide whether to incorporate at all – register as a company with Companies House or other body. Unincorporated organisations (such as Association, Trust or Partnership) have no legal identity separate from individual members. Members of its management committee will ultimately have personal legal and financial liability. In an incorporated company, members of the board have a limited liability – if everything goes horribly wrong then they are only liable to the amount of money they put in, a nominal sum - usually not more than £10. (That is unless they can be said to have acted improperly or outside the law, in which case they will be personally liable.)

Any organisation which intends to develop any substantial trading activity should be incorporated as it reduces the personal liability of the members. It is not as onerous as it sounds and is a very simple and quick process. A company can be got up and running in a matter of days.

The most common forms are

• company limited by guarantee

• industrial and provident society

• community interest company

Limited Companies

This is the simplest form of incorporated company. Limited companies are owned and controlled by their members. They can either be a

Company Limited by shares.

This means that any profit will be shared amongst the members of the organisation. As the company grows, its profitability grows and so does the share price, soothe shareholders make money. The share model may be used by Social Enterprises that are employee-owned, but they will not be likely to attract any grants.

Company Limited by Guarantee.

Often called 'Not for profit organisations', it doesn't mean that the organisation cannot make a profit, simply that any profit will be reinvested into the company or to assist the beneficaries. Directors may be able to take a wage if the Memorandum of Association allows. This is the most common form for organisations such as this.

Industrial and Provident Society (IPS)

An IPS can take two forms – they qualify if they carry out an industry, business or trade and are either 'a bona fide co-operative society' or are intended to be conducted 'for the benefit of the community'

IPSs are registered with the Registrar of Friendly Societies under the Industrial and Provident Societies Act 1965.

The 1965 Act does not define what a 'bona fide co-operative society' is but the Registrar of Friendly Societies has issued guidelines which state that:

• Business must be conducted for the mutual benefit of the society's members

• All members must have an equal say in the running of the society

• A society that operates with the object of making private profit cannot be a bona fide co-operative society. Any surplus must be re-invested and the amount of interest members can be paid on the money they have invested in the society is restricted regardless of the level of profit.

• The society must have at least 7 members

• Membership must be open to all who work in the organisation

Community Interest Company (CIC)

This is a relatively new legal form and seems to be the flavour of the month at the moment. A CIC is not for everyone, it is just the newest of several options for legal structures for social enterprises. They are a sort of halfway house between a business and a charity.

Charity law is centuries old and people have been looking at modernising how they work and coming up with suitable structures that represent the needs of a modern charitable organisation. There is more of a need for charitable organisations to be able to make their own money and charities as such are very restricted in this.

CICs were introduced to offer a modern recognisable form for social enterprises and those organisations wishing to carry out socially motivated objectives. They are based on a model used in America.

Like a Limited Company, they come in two forms – limited by guarantee or by share. A CIC must first be registered as a limited company. The key points of CICs are:

- they must have a lock on assets

- directors can be paid

- it is possible to access Equity Finance.

They cannot get charitable status, although charities can become CICs (but would lose their charitable status and any assets could not be transferred to the CIC). An alternative is for a charity to establish a separate CIC that donates any profit to the parent charity.

A CIC must provide a 'Community Interest Statement''. This will show that everything it does will contribute in some way to benefitting the community. It considers how you will use any surplus and how you differ from a commercial company. Applying is a very simple process.

For any of these structures the key point is the 'asset lock'. This is a provision that must be present in the memorandum and articles, or constitution. It simply means that any assets of the organisation are locked within the organisation and can only be used to meet the objectives of the organisation, or passed to another organisation with similar aims and objectives. There can be no asset transfers unless at the full value market price, ie. things cannot be given away, unless you want to transfer to another asset locked body.

For more information:

FSA approved list of IPS model rules

National Council for Voluntary Organisations - Governance and Organisational Structures

Community Interest Companies 

Companies House

Voluntary Action Calderdale

Voluntary Action Kirklees

Bradford Community and Voluntary Service

Keighley Voluntary Services

Voluntary Action Oldham

Voluntary Action Rochdale

Co-ops UK

Charity Commission

Next: Other development options

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