Structures for the third sector

When a third sector organisation is established it has to decide two things:

• Whether to be incorporated (have a formal legal structure or status) or unincorporated, and  
• Whether the activities are charitable or non charitable.  

If we start with the second point, are the activities charitable.  If an organisation is set up for charitable, social, educational, philanthropic, religious or similar purposes, and is required to use any surplus only for the organisations purpose, and is not part of any government department or local statutory body it would be eligible to be known as a charity and could be registered with the Charity Commission.   

Incorporated means that you are registered as a company, or an industrial & provident society or by statute or royal charter.   

Unincorporated organisations

Unincorporated organisations are not recognised for legal purposes as having a legal entity – this can prove difficult when bidding and tendering for large contracts from the statutory sector. If an organisation is unincorporated it is only the individual members of the governing body acting together, that are recognised as the organisation. This carries liabilities if things go wrong.

Advantages

• Simple and flexible. No need to have the constitution agreed by any outside body (unless you are registering as a charity).
• Cheap to run. No need to submit accounts to anyone outside (unless you register as a charity, or funders demand it).
• If you have charitable aims, you can register as a charity and gain advantages such as funding which is available only to charities. 

Disadvantages

• Some funders may prefer a more formal structure, especially if you are looking for big sums of money.
• Your group has no separate legal existence – it is a collection of individuals. This means that: 

1. it cannot own property in its own right
2. it cannot enter into contracts – if it wants to rent premises or employ people, this is done in the eyes of the law by individuals on behalf the group.
3. individual members of your management committee are personally responsible for the group ’s obligations and debts, and are liable if, for example, it is sued. 

The fact that this is so flexible and cheap means it is ideal for many small groups. If you are considering doing something more major – employing a worker or managing a building – you may well need a structure which gives the group a legal existence and gives members more individual protection. 

Incorporated organisations

Incorporated organisations are a legal entity and as such can:

• Own property
• Enter into contracts
• Take legal action 

Most charitable organisations will choose to become a private company limited by guarantee, although there are a range of other incorporated structure they could choose.  These include an Industrial and Provident Society or a Community Interest Company. 

By using a limited liability structure you are giving additional protection to the members and board members.  In unincorporated organisations in the event of debts or insolvency members and trustees are personally liable for the debts but incorporated organisations are responsible for their own debts as a company.

Company limited by guarantee

There are no shareholders and any surplus is reinvested in the company. This type is recommended by the Charity Commission. 

Company limited by shares

This type of company is more usually found in the commercial sector, where its members (shareholders)are investing money in the hope of gaining a profit. However, there are some organisations in the community which are set up as companies limited by shares. 

Advantages

• It is very suitable for a larger organisation which has considerable assets (e.g. equipment, a building)and employs more than a few staff.
• The company can take on legal obligations and buy property in its own name. The organisation and not its members is responsible for any debts. However directors do have a legal duty to act prudently and to ensure that the company manages its finances carefully.
• Many funders regard this structure as more stable, as they know the company will continue to exist even if there is a change of people involved. This increases your chances of success if you are applying for larger sums of money. Some funders will give grants only to registered charities. 

Disadvantages

• It is expensive to set up.
• It is time consuming to run and annual accountancy fees can be high.
• A charitable company is regulated by both Companies House and the Charity Commission. You have to notify them of every change of directors/trustees and draw up a particular form of annual accounts and reports.
• A charitable company cannot have political or campaigning aims, but you can have educational ones. 

Generally voluntary sector organisations are private limited companies and do not issue shares so are limited by guarantee rather than limited by shares.  

Of the local infrastructure organisations operating in Newham our research has shown that:

7 are registered charities and companies limited by guarantee,
3 are only registered charities but one of these is seeking incorporation,
and 1 is currently seeking registration as both a charity and company. 

Industrial and provident societies (IPS

The definition of an IPS is “….bona fide cooperatve societies, and voluntary organisations carrying on an industry, trade or business for the benefit of the community” Industrial and Provident Societies Act 1965 s1(1), (2) 

An IPS can not register with the Charity Commission but can state that it is a “charity exempt from registration” 

This structure is only suitable for a membership organisations that would want to share profits or pay dividends back to its members. 

Community Interest Company (CIC)

These are limited companies that have been designed such that the business is run for community benefit rather than private advantage.  It is hoped that this will be a legal structure for social enterprises.  There is a community interest test and asset lock to ensure that companies fit the criteria.An organisation can not be a charity and a community interest company.  But a charity can own a CIC as a trading arm. 

Deciding on a suitable structure

Throughout the life of a group it is conceivable that it will need to change it’s structure as it grows or enters new fields of work.  The trustees need to determine what is most suitable for the group at that moment in time.  It would be foolish for a small unfunded group to consider the need to register as a company.  In the same way large well funded groups are putting their trustees in a precarious position for their own personal liability if they are not incorporated.  We have devised this checklist to help trustees decide on the best form for themselves. 

Are you a formal group with management committee, rules and members?

• Yes – next question
• No – need to consider possible future activities.  If likely to exist longer than for a one off project may need a set of rules and governing body. 

Do you receive any funding – grant, membership sales or otherwise?

• No – Review if situation changes
• Yes – What type of bank account do you have and how much do you turnover in a year.

Should have charity or treasurers account in the name of the group and with at least two signatures – ideally from a choice of 3.If turnover is over £1000 a year you need to register with the Charity Commission. 

Are your activities solely charitable?

• Yes – need to register with Charity Commission.  Also need to consider protecting the liability of individual trustees by becoming incorporated at Companies House
• No – other structures are available to voluntary or community groups based on their activities.

If no –
Do you sell services or products but ensure the profit is solely returned to beneficiaries.  Consider being a social enterprise and registering as a Community Interest Company.  If follow this route can not register as a charity and this may be a problem for some funders. 

If partly sell services or products but also carry out charitable activities and projects may need to consider registering the charitable activities as a charity and setting up a community interest company that is owned by the charity for the trading activities

If no and you operate solely for a membership carrying out charitable activities and profits are shared between the membership and supporting the work of the group the best structure would be an Industrial and Provident Society. You can not register as a charity but need to make sure members and governing body happy with terms of registration – see Industrial and Provident Societies Act 1965 

Is your turnover over £10,000 a year but under £250,000?

• Yes – Need to prepare accounts that are independently examined unless otherwise stated in your governing document or by your funder.  You will also be required to prepare an annual report.  Should have some form of protection of liability of individual trustees, usually by incorporation.
• No – should prepare accounts and good practice suggests they should be externally examined and kept on file.  Annual report only required if registered with Charity Commission. 

Is your turnover of over £250,000?

• Yes – need to prepare audited accounts for this and subsequent 2 years if turnover drops.  Must prepare annual report.  Must have some form of protection for trustees liability 

Do you own property or manage a permanent endowment?

• Yes – you need to register your charity even if you do not meet the income levels.  You should also consider incorporation to protect your trustees liability.
• No – depending on your turnover level you should consider registration. 

If you change the structure of the organisation you will need to ensure that your governing document reflects the current structure and that trustees are fully aware of the roles, responsibilities and liabilities within the structure.  You may need to alter the governing document by a special general meeting in order to allow you to assume a new structure.