Types of legal structures
Once your group starts to progress and consider projects that require funding (for example), it may be time to have rules and regulations through a legal structure, to help guide the work to avoid any difficult situations in future.
There are three types of organisation structure for groups:
- Small groups
- Constituted groups
- Incorporated organisations.
You can also have the status of:
- Social or Community Enterprise.
Why you need a legal structure
A voluntary group can sometimes carry out its work quite easily and happily at a practical level without being formally constituted and organised. If all is going well there often seems no real need to have rules and regulations to guide the work. However, it is all too easy to end up in difficult situations if your work is based on verbal agreements and loose understandings.
This situation is magnified when you establish an organisation and begin to consider the types of activities discussed in the previous section. As soon as you begin to talk about owning buildings, employing staff or entering into any major contracts it becomes clear that you need to consider some form of legal structure. This will help protect the individuals involved from personal liability and give your community anchor organisation clear governance procedures, an identity, continuity and credibility.
Taking on a legal structure in the form of a company is called ‘incorporating’. This gives your community anchor organisation a separate legal identity from the people involved in running the organisation (i.e. the directors). It also provides the people involved in the community anchor organisation with the benefit of limited liability.
Incorporation should be considered if an organisation:
- Is likely to own land, buildings or investments or enter into leases
- Will have paid staff
- Will have long term financial commitments without adequate reserves or assets to cover them
- Will carry out activities or services which carry a financial risk
- Is finding it difficult to recruit people to the governing body (committee) because people are concerned about potential personal liability for the community anchor organisation’s debts
In addition, if incorporation is being considered, the organisation should ensure that it:
- Has the administrative capacity to deal with the extra paperwork and requirements
- Has directors who understand that they are not totally protected from personal liability under certain limited circumstances (see note below*)
- Has directors who understand enough about finance to ensure the organisation does not carry on operating when it is unlikely to meet its financial obligations when they’re due (and who understand that if the organisation does carry on operating in this situation, they could be held personally liable if the organisation cannot meet its financial obligations).
Community events and simple projects can be run by a group of individuals working together without any formal structure. It’s important to take a balanced approach to risk and take good advice about what level of formality is necessary to protect yourselves as individuals and the community who are involved.
The Joseph Rowntree Foundation has produced an excellent guide on how to get on and do things in your community without getting hung-up on red tape.
Zurich Insurance also has an excellent online resource with guidance on health and safety, insurance and managing risk for small community groups and initiatives such as street parties and parent toddler groups.
Becoming a constituted group
However, the time may come when you need a more formal structure for your community group, particularly if you wish to raise finance or funding or enter into a legal agreement.
The first stage in becoming a more formal organisation may be to adopt a constitution. A constitution is a simple set of rules which for you or your group to help make it clear to everyone involved what you intend to do and how you intend to operate. There are no legal rules about what your constitution should say, but there are good examples here and here.
If you are going to apply for grant funding, this document will show funders that you are well organised. The sorts of things you need to set out in your constitution include:
- The name and purpose of the group
- Who the members of the group are
- Who makes the decisions –the committee or board members
- How the committee will work with processes for decision making/resolving disputes
- Any designated roles such as Chair, Treasurer & Secretary
- Who has responsibility for Health & Safety
- How money is to be managed
- What powers the group has – for example: to raise funds, to give out grants, to manage buildings, to employ staff and so on.
As a constituted group – sometimes called an association – you are now able to apply for funding, set up a bank account, buy insurance, rent property, own equipment and even employ staff. You can also apply for charitable status.
However, it is very important to be aware that a constituted group is not an incorporated organisation and is not a legal body in its own right. It has no separate legal identity. That means that individual members who enter into obligations, such as contracts, on behalf of the group are responsible as individuals for its debts and other liabilities. The central feature of unincorporated businesses or organisations is personal liability for the owner, partner or member of the management committee.
If you are on the management committee of an unincorporated association your personal assets are at risk if the assets of the organisation are not sufficient to cover all the debts and liabilities.
An unincorporated group or association is perfectly appropriate if you want to run informal or small-scale community events or activities, such as:
- Befriending activities
- Coffee mornings
- Lunch clubs
- Music events
- Five-a-side competitions
- Parent and toddler sessions.
A Neighbourhood Forum set up for the purpose of producing a Neighbourhood Plan can also be an unincorporated, constituted group.
Once you have written you and agreed your constitution, it becomes the ‘governing document’ of your group. A good constitution sets out how your group is run, and can help to resolve disputes and enable new members to fully participate in group activities.
There are some types of community projects which require a higher level of formality due to the nature of the responsibilities they are entering into.
If you are taking over a community asset or local service, or starting a community enterprise which is based on trading and will involve managing significant amounts of money, employing staff and entering into contracts, then adopting an incorporated organisational form is highly recommended.
There are four types of incorporated legal structure most commonly adopted by community organisations and community enterprises:
- Company Ltd by Guarantee with charitable status (CLG)
- Community Interest Company (CIC)
- Community Benefit Society
- Charitable Incorporated Organisation (CIO).
These are all types of legal structure which allow you to build in community membership, accountability to your community, reinvest profits back into your community and also include an ‘asset lock’ which safeguards any assets owned by the organisation from being sold for private benefit.
The legal structure you choose is important – it can affect the type of funding or investment you can apply for, the way in which the community has a say in the running of the organisation and who benefits from the organisation’s activities.
Charitable or not?
An additional decision to make is whether you want your organisation to be charitable, and this depends on the purpose of your organisation.
Charity is a legal status for an organisation, not a legal form or structure and it is usually additional to the basic legal form you adopt (the exception is a CIO which combines a company structure with charitable status). Some legal forms and organisational types (e.g. community interest company and co-operatives) are incapable of being charities because they are designed to provide non-charitable benefits, for example members or shareholders may be entitled to certain payments or distribution of profit.
A charity has limitations on how much trading it can do to generate income, but it can set up a wholly owned trading subsidiary which generates profit to pay back to its parent charity.
Read more on charitable status, and what makes an organisation charitable here.
Social or community enterprises
Social or community enterprises are defined as business types, not legal entities in their own right.
A social enterprise aims to create social good through trading and enterprise. Read more about social enterprises.
A community enterprise is a business owned and operated on behalf of a specific community or neighbourhood which reinvests its profits back into the business and the community. Read more about community enterprises.
Both social enterprises and community enterprises can set up using the legal forms described above.Read our full guidance on types of organisations here