Constitution


Development Trusts need a legal and management structure which balances the two elements of their work: on the one hand carrying out a range of economically, socially or environmentally useful projects, on the other generating income to sustain their operations

As such, Trusts have to be small businesses which also do unprofitable work. They have to be independent and entrepreneurial - yet able to call upon charities and sponsors for support not available to the private sector.

Development trusts have been defined as:

Independent, not-for-profit organisations which take action to renew an area physically, socially and in spirit. They bring together the public, private and voluntary sectors, and obtain financial and other resources from a wide range of organisations and individuals. They encourage substantial involvement by local people and aim to sustain their operations at least in part by generating revenue. (Creating Development Trusts, HMSO, 1988).

The structure most Trusts adopt is that of a company which does not distribute profits - known as a company limited by guarantee - which may also be able to achieve charitable status. Some Trusts have an associated trading company in addition, if they are a charity and their income generating would jeopardise their charitable status.

Strictly speaking, there is no particular significance in the use of the term Trust in this instance. It is a convenient shorthand for a non-profit distributing organisation with wide-ranging objectives; it does not signify some particular organisational model.

The company limited by guarantee

This form of company is similar in some ways to a conventional company limited by shares. Its operations are governed by the Company Acts, and it has a Board of Directors.

However, instead of shareholders it has members, and instead of buying shares and receiving dividends they offer a guarantee - usually a nominal £1 - as the limit of their liability.

Since there is also generally a provision that assets of the company can only be passed to a similar company if it is wound up, there is no way to distribute profits for private gain.

Funders and supporters of the Trust can be sure that any surpluses are either ploughed back into the company to meet its objectives, or distributed for charitable purposes.

Charitable status

Being a charity is a matter of status, not of organisational structure: it is possible to secure charitable status for a number of different structures. The issue is essentially whether the objectives of the organisation are accepted as charitable by the Charity Commissioners, and it has an appropriate constitution. Because of its not-for-profit nature, a company limited by guarantee with charitable objectives can apply for charitable status.
Among the advantages of charitable status are:

Among disadvantages are:

Members of the Trust

The precise rights and duties of members will depend upon the memorandum and articles of association of the Trust - its constitution. These can be drafted to allow organisations or individuals - or both - to be members.

Members can be given rights to elect the directors - or this right can be restricted to a particular class of member, perhaps the main sponsoring organisations. The structure of a company limited by guarantee is highly flexible and can be tailored to the particular circumstances of the Trust concerned.

Responsibilities of the Board and Trustees

The Board of directors of the Trust company take responsibility for the actions of the Trust, but - provided they are not negligent - the personal liability of the directors is limited to the extent of their guarantee (usually £1).

The directors usually concentrate on policy issues and may delegate action to staff and/or sub-committees. In a charitable company the Board of directors also act as Trustees of the charity, and as such have additional responsibility to ensure Trust funds are only used for its charitable purposes.

Since Trusts are action-oriented organisations where swift decision-making is important, there is a strong case for limiting the size of the Board, preferably to less than 12. Other interests can be invited to join sub-committees or act as specialist advisers to the Trust.

Generally the aim should be to have only two layers of control - the directors and the staff. Don't build too much complexity into the constitution - set up sub-committees when they are needed.

The relationship of the chair of the Board and the senior member of staff (perhaps termed executive director) is crucial to the success of a Trust. The chair is responsible for effective decision-making by the Board, the executive director for servicing the Board and management of staff. The two must be able to work closely together.

Representation on the Board

Directors should be chosen for the benefits they can bring to the Trust in terms of their contacts, personal skills and standing within the community. They should be capable and committed individuals - not committee time-servers.

There is a case for having a range of different skills represented on the Board - finance, project development, community involvement - so the Board can make a significant contribution to the work of the Trust, not rubber-stamp staff proposals.

The consensus among those running existing Trusts is that it is wise to avoid a majority of local authority officers or members on the Board, in order to safeguard its independence. Legislation aimed at stopping local authorities setting up subsidiaries does, in any case, prevent this in most cases. There are restrictions on the level of control, through representation or finance, which local authorities can have over Trusts without incurring financial penalities.

In order to maintain its independence and control over its affairs the Trust should provide its own secretarial and financial services.

Trading companies

A charity should not trade unless it does so as a means of directly achieving its objectives (for example, a workshop for the blind). For this reason some Trusts set up parallel trading companies which can sell products or services and covenant profits back to the Trust. If this is done, it is important that the two are linked closely through joint directorships to stop the trading company going its own way.

A separate company can also be used if there is to be an active campaigning arm, or where some activities like job creation don't fit into the narrow limits of what is legally charitable.

Staff

In general a Trust needs one or more full-time paid staff to operate. Once the Trust has a substantial work load, it will probably need more. For example:

Many Trusts also offer opportunities to volunteers to work on projects, help in the office, produce publications or even run a shop if the Trust has one.

Legal advice

Setting up a Trust requires specialist legal expertise. It does not form part of the day to day work of most solicitors in private practice or the public sector, and consequently it is wise to use a solicitor familiar with companies limited by guarantee and securing charitable status. This will avoid delays in drafting an appropriate charitable objects clause for the memorandum and articles, and considering options on membership and voting rights.

The Trust should also keep its legal adviser in touch with any major problems which arise, in order to avoid longer term crises.

Checklist

The following are the main questions to be considered in drafting the memorandum and articles - that is, the constitution - of a Development Trust.

They are intended only as a guide to the issues to be covered, since there are potentially large variations in the internal structure which could be adopted.

The issues raised should be discussed with a solicitor specialising in companies limited by guarantee.

Name and status

Objects and powers

Membership

The Board

Meetings

Dissolution


© David Wilcox david@partnerships.org.uk. Tel +44 (0)1273 677377. Fax: +44 (0)1273 677379. These information sheets may be freely distributed with this attribution, but not republished as a whole.
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