The legal structure can have a huge impact on any future activities, such as fundraising, trading or contracting because your legal status is closely linked with how you are governed and regulated. It can also affect your legal rights as an organisation. Here are the structures that should be considered, this gives you a basic guide to what is best for your community group or not-for-profit business.
If you are a community group, local club, or association that is not registered with the Charity Commission, your type of organisation is known in legal terms as an ‘unincorporated association’. This means that even if you have your own name as a group, you are simply a group of people coming together under a shared interest or activity and you have no separate legal identity. Since your organisation is not a separate legal entity in the eyes of the law, individuals take personal liability for any risk or debts and you cannot enter into any legally-binding contracts in the organisation’s name.
If your organisation has charitable aims and is for the benefit of the public, you might like to register as a charity. The Charity Commission regulates and administers all registered charities in the UK, offering much guidance through their website. (link to Charity Commission website here)
Registering as a charity is not a legal form in itself. In order for your organisation to become a separate entity in the eyes of the law, organisations must become ‘incorporated’, choosing a legal structure that is right for them. The following ‘incorporated’ forms introduce the main types of legal structures within the voluntary and community sector.
Charitable Incorporated Organisation (CIO)
A CIO is a legal structure regulated by the Charity Commission that was introduced to help simplify the process for setting up a charity. A CIO is governed by Charity Law (not Company Law) and the liability of trustees is limited (rather like being a director of a limited company).
There is no minimum level of income required to register as a CIO so a new organisation can immediately apply to be registered at the Charity Commission.
There are two forms of CIO:
Association model – this has a wider membership, including voting members other than charity trustees
Foundation model – the only members are the trustees and there is no wider membership
Company Limited by Guarantee (CLG)
A CLG is essentially a private company that reinvests any profits back into the company.
It has its own members but does not have shareholders or shares – because of this they can apply for charitable status. A CLG means that an organisation becomes incorporated as a legal entity in its own right.
In order to become a CLG you will need to register with Companies House as well as the Charity Commission (this is often done at the same time). This means that CLG’s have to comply with both Charity Law and Company Law.
Co-operative or Community Benefit Society (CBS)
CBS’s are organisations that carry out a business, trade or industry either as a co-operative or for the benefit of the community.
They are more expensive to set up than a charity and are generally less common as a legal form because their governance structure is more complex.
There are two different types of CBS. The more common type is a co-operative society, which is run for the mutual benefit of its members. In a co-operative, any surplus is still ploughed back into the organisation. The difference is that co-operatives are owned and run by the people who work there, its customers, or by a group of businesses that have come together to form a consortia under the co-operative model.
The other type of CBS is a community benefit society run solely for the benefit of the community, although there is much overlap between the two.
Community Interest Company (CIC)
A CIC is a type of company designed for social enterprises that want to use their profits and assets for the public good. CICs are intended to be easy to set up, with all the flexibility and certainty of the company form, but with some special features to ensure they are working for the benefit of the community. CICs are formed for a wide range of purposes and vary in size accordingly. CICs cannot be a charity and governance arrangements can vary greatly.
CICs must register with Companies House and also satisfy a Community Interest Test to show the primary purpose is to provide benefits to the community, rather than to the individuals, who own, run or work in them. Each year CICs are required to send a copy of their annual accounts to Companies House (like other companies), but also must produce an annual Community Interest Report as well, outlining their activities for the community and how they are involving their stakeholders in their activities.
In addition, assets and profits have to be used for the community interest so there will be a limit on the levels of distribution of profits or assets that may be made to members – this is known as the asset lock.