Thinking about incorporation

Choosing how your club or organisation is legally structured is one of the most important decisions you’ll need to make. While there are lots of different legal structures available, there are some fundamental differences between those that are incorporated and those that are unincorporated.  

What’s the difference between being incorporated or unincorporated? 

Incorporated organisations have a separate legal identity from the people who run or own them. They’re independent, legal entities. The people that run or own them aren’t personally responsible for any liabilities like debts or legal claims and their personal assets are protected (unless they collectively or individually act negligently or fraudulently). As independent entities they can exist indefinitely regardless of what happens to those that own or run them.  

In legal terms, unincorporated organisations are extensions of the individuals that own or run them. This means that the people who own or run them can generally be held personally responsible for any liabilities the organisation incurs. So, if an unincorporated organisation were to get into debt, or forced to pay compensation, the people that own or run it are likely to be legally required to cover this from their own personal wealth. They are not protected in the same way as those running incorporated organisations.  

Benefits of incorporation

Being incorporated has lots of benefits, it ensures that:

·         There’s usually no personal responsibility for any legal actions or debts.

·         Assets don’t need to be transferred when individuals move on from the organisation.

·         Entering into contracts or employing individuals is easier.

·         The administration of contracts or assets is easier as they’re not signed for and held by one individual.

·         Personal assets and reputations are usually protected.

The incorporation process

Thinking about, or changing, your legal structure might feel daunting, but the process of incorporation can be started before you need to engage a legal team.

There are a few different options to consider, these are explored in more detail on our incorporation webpage. It’s important to consider the benefits of each option and your eligibility, before identifying which suits your organisation best.

The main options and the initial steps to explore before needing the input of a legal team include:

Becoming a charitable incorporated organisation (CIO). These organisations are regulated by the Charities Commission for charity trading and income from gifts and grants only. Consider the eligibility criteria and ensure you meet the ‘public benefit requirement’. Key things to think about:

1.     Selecting trustees who’ll be responsible for understanding the legal requirements and operational aspects of the charity.

2.     Considering your organisations name, whether it’s available and meets the government rules.

3.     Decide on, and write out, your organisation’s purpose and rules – this’ll help you create a governing document which you will need upon application.

For more information on becoming a CIO and links to the registration process, visit the ‘Set up a charity: step by step’ government advice.

Becoming a community interest company (CIC). These organisations exist to benefit the community through various measures and are viewed more like social enterprises. Key things to think about include:

1.     Drafting a ‘community interest statement’ that outlines your organisation’s plans.

2.     Ensuring your constitution is written and up to date.

3.     Considering how your assets are ‘locked’, this means they can only be used for your social objectives and limiting the money paid to shareholders.

For more guidance on setting up a CIC take a look at the CIC regulator’s website. To register a CIC visit Companies House.

Becoming a company limited by guarantee. These are often member-owned organisations run on a not-for-profit basis, where members vote for actions related to the organisation’s running and are liable to pay a small, specified, amount if the club/group becomes insolvent. Things to think about include:

1.     Your organisation’s name.

2.     Checking your rules, availability, and any existing trademarks.

3.     Deciding who your directors, secretary and guarantors will be.

4.     Preparing the documents for how to run your organisation i.e., memorandum of association.

Becoming a company limited by shares. These organisations are owned by shareholders and are typically larger clubs with investors. Things to think about include:

1.     Your organisation’s name.

2.     Checking your rules, availability, and any existing trademarks.

3.     Deciding who your directors, secretary, and shareholders will be and how much control they each have (this is usually a percentage).

4.     Preparing the documents for how to run your organisation i.e., memorandum of association.

More information on companies limited by guarantee and shares, including next steps for registering, can be accessed on the government website limited companies page.

Becoming a cooperative or community benefit society. These organisations exist for the benefit of their members (co-operatives) or the wider community (community benefit society). They’re businesses with limited liability, are regulated by the financial conduct authority and governed by the Cooperative and Community Benefit Societies Act 2014. Key things to think about include:

1.     Identifying a secretary and three trusted members that can be involved in the application process.

2.     Drafting the rules and plans for your organisation.

3.     Exploring the Cooperative and Community Benefit Societies Act 2014.

 For further resources visit our page on ‘Principles of good governance’ and ‘Legal structures’. Or go directly to HM Revenue & Customs advice.