Voluntary Organisations- to Incorporate or Not – That is the Question

Consultancy

When people get together to carry out a particular activity they do not immediately think about the legal nature of the group they are forming. They act together to carry out a task and do not realise that they may have obligations and responsibilities in law to each other.

The legal nature of the group becomes an issue when they decide to write down some form of rules for the group, usually in response to a request for such rules from a grant making body or in the course of seeking charitable status.

The group has several structures to choose from. It should choose the structure which most suits its present needs and the needs it can envisage for the future as the group develops. Two of the most commonly used structures are outlined below. There are advantages and disadvantages to each structure and these should be considered carefully.

Unincorporated Association 

This is the most common form of structure for voluntary organisations. The association exists where a group of people band together to carry out an agreed object and where it is intended that there should be some provision for continuing membership and the future existence of the group.

The association is governed by a set of rules or a constitution which sets down the objects of the association, its membership and structure and the powers it gives itself to carry out its objects. The association is composed of members who delegate their power to a management group to carry out the association’s activities. The management group is accountable to and elected by the members.

Advantages

  •  Flexibility – The constitution of the association can be tailored to fit the varying types of association. The association is free from the statutory controls which govern the limited company.
  •  Cost – An unincorporated association is cheap to set up and run.

Disadvantages

  • No Separate Legal Entity – An association has no separate legal existence apart from the members of which it is comprised. The constitution is the legal document which governs the association; it forms a contract between the members and establishes the rights and duties they have to each other. Within the association the members and the management group act as a group of individuals and the group has no separate legal status. This means that the association cannot own property or enter into contracts etc. and these activities are carried on by individuals within the association.

 

  •  Trustees – As the association cannot own property, provision must be made for individuals to be appointed as trustees to hold the assets of the association. Frequently, the association does not formally appoint trustees; and property, either land or equipment, is bought in the names of officers or committee members. These individuals may be acting as trustees without any clear definition of the trusts on which they hold the property. Problems can arise where trust property continues to be vested in individuals, whether formally appointed as trustees or not, who are no longer connected with the running of the charity or where the association has become defunct.

 

  • Personal Liability – Both members of the association and the management group may incur personal liability. If, for example, a contract authorised by the management group is entered into and the association’s funds are inadequate, the individual members of the management group would be liable to pay the debt. If an officer of the association incurs liability in the course of his/her work for the association, has acted properly and not negligently within the terms of the constitution and the authority confirmed upon him/her, he/she will be entitled to reimbursement from the association’s funds.

It is extremely important that those concerned with an unincorporated association and in particular, the management group, should ensure that the constitution is complied with, that reasonable care is taken in dealing with the association’s affairs, that commitments are only entered into if sufficient funds are available and that competent agents and employees are employed.

Proper insurance should be taken out to cover foreseeable risks.

 

Company Limited by Guarantee

A company is constituted by its Memorandum and Articles of Association. A Company Limited by Guarantee is the usual form of Limited Company found in the voluntary sector.

Advantages

  • Flexibility – There is provision within the Companies Act to allow for the objects of the company and the regulations which govern administrative matters to be amended and updated.

 

  • Corporate Identity – The Company is a legal person capable of owning property and taking on and defending actions in court. As it can own property, there is no need to appoint trustees to hold the property to be transferred into the names of new trustees from time to time.

 

  • Limited Liability – The company is a legal person and its debts and contracts belong to the company itself and not to its members. A member or officer of a company is not personally liable if the company is sued or owes money. His or her liability in the event of the company being unable to meet its debts is limited to the amount that he/she guarantees when becoming a member. This is usually £1. Members and officers of the company are protected by this Limited Liability of the company in respect of contracts they make on behalf of the company. This limited liability is important where the organisation is considering borrowing money, buying land or buildings or employing staff who might create liabilities for the organisation by acting outside the practical control of the person responsible for overseeing staff. However, the protection from liability is not absolute; if an officer or director acts negligently, or not in the best interests of the company, or while disqualified etc. they may not be able to avoid personal liability. It is worth noting as well that limited liability does not always provide protection as banks may require personal guarantees for any borrowing.

 

  • Involvement of Members – The company is a democratic structure where members have ultimate control over those managing the company. Directors (the management group) are answerable to the members for the conduct of the company’s affairs and are capable of being removed from office by a resolution of the company. New members can join the company and can also be expelled from the company without undue formality.

 

  • Continuity – Until it is wound up a company has perpetual succession, i.e. it continues to exist even though its members may change, die or cease to be involved in the activities of the company. While winding up the company is a complex business, it is preferable that this is undertaken when the purpose for which the group was originally formed is no longer applicable.

 

Disadvantages

  • Cost – It costs money to set up and run a company. Professional advice will be required to draft the Memorandum and Articles of Association and there is a registration fee of £40. Annual Accounts and an Annual Return must be submitted to the Registrar of Companies; there is an annual fee of £20.

 

  •  Lack of Privacy – There is a statutory requirement to inform the Registrar of Companies of any changes in directors; company documents are available for public inspection. (Note, while director personal addresses are recorded by the Registrar, they are not visible to the public.)

 

  • Bureaucracy – Companies must comply with the statutory requirements of the Companies Act. This sets out detailed rules governing changes of objects, rights of members, meetings etc. The Group may consider it worthwhile to employ someone who is familiar with these requirements as Company Secretary to ensure that these formalities are complied with.

Leave a Reply