Centres overview
Process
Community
Business plan
Buildings
Technology
Legal structure
Finance
People
More help

Legal structures for resource centre

The issue of a constitution or legal structure - together with funding - is one the issues likely to be raised early in any discussion of a resource centre. Like money it is essential - but should also, as with funds, be considered in the context of other issues.

Does a community group need a legal structure when it starts?

A community group normally begins with no recognised legal body in law - it is unincorporated - it is just an association. If its job is to start or manage a project, it may be known as a Steering Group. The group may elect officers - such as a treasurer and a chairman - decide on a procedure for members to join, vote and leave, and write these rules into a constitution.

Provided the members of the group do nothing illegal, and the group adheres by its own rules, it has the freedom to act as it likes. But any decisions its members take, or anything they do, they do in their own name and under their personal responsibility.

When should a group take on a legal structure?

When the group wishes to:

  • hold valuable assets, for example acquire a building
  • negotiate a lease
  • sign a contract
  • employ people

While it is "unincorporated" (without a legal body) the group cannot do these things in its own name. It would be possible, but unwise, for a particular individual in the group to take such responsibilities personally. So at the stage these actions are needed, the group normally "incorporates" - or takes on a legal body.

This gives its members considerable protection under the law from personal liability for the group's debts, any breaches of employment law, contractual obligations and so on. It also goes some way to protecting the group's assets from an individual's malpractice.

What legal structures are suitable?

There are two commonly used structures for Community resource centres, each with its own pros and cons. Each will involve a cost in set-up, and proscribe certain things you must (or must not) do in a legal document (or governing instrument). The advice in this section is for guidance only - get professional advice from a body like ICOM or a Solicitor who understands community development.

Company Limited by Guarantee

This structure offers limited liability for debt in the event of the company winding up, the limit being guaranteed by the members, who must pledge a sum which is usually nominal (£1). It is suitable for trading and non-trading bodies. Membership is not related to capital investment by the members. Members have the right to vote on how the company is run (usually one member one vote). It is usually set up either to benefit members only (a form of co-operative) or to benefit members and a wider community (the latter distinction is important for Lottery funding). A minimum of two members (individuals or organisations) is required.

Advantages

  • Relatively cheap to register and run
  • Relatively quick to register - a matter of weeks (Companies House is computerised)
  • Extremely flexible in what it can do and how it can be run, who are members etc., although these must be laid down in the governing instruments (Memorandum and Articles of Association)
  • Banks and accountants are usually more familiar with this structure than an IPS
  • It can become a Registered Charity

Disadvantages

  • Subject to Company Law which can be complicated
  • Annual audit required
  • Annual fee for filing the Annual Return
  • Accounts and other documentation open to public scrutiny at Companies House
  • Not possible to get rid of the distinction between Members and Directors (this can be a problem in some democratic structures- eg co-operatives)
  • Its character could be changed in a take-over

Industrial and Provident Society (IPS)

An IPS must be registered with the Chief Registrar of Friendly Societies and falls under the 1965/78 Industrial and Provident Societies Act. An IPS must be running a 'trade, industry or business'. There are two types of IPS, one which matches a co-operative and one which suits 'societies for the benefit of the community'.

The latter is less likely to have significant membership benefits, though small discounts, for example, may be written in. They are both governed by instruments called 'Rules'. There must be at least 7 members and membership is open without restriction to all who qualify; members must have equal rights.

Advantages of the IPS Structure

  • The legislation governing operation is fairly simple.
  • The requirements for audit are less stiff than for Companies.
  • There is no filing fee for the IPS's Annual Return
  • This structure may be more acceptable to certain grant giving bodies (eg Lottery).
  • Specially written 'Model Rules' can be supplied by a specialist organisation like ICOM
  • An IPS may be classified as an 'Exempt Charity' under Inland Revenue rules to give it broadly the same benefits as a Registered Charity (It cannot obtain Registered Charitable status through the Charities Commission).
  • More difficult to 'high-jack' its aims (eg through a change of Directors, buy out or take-over).

Disadvantages

  • The structure and objects of the society are fairly inflexible, and more difficult to change than a Company, once set-up (though this makes it harder to 'high-jack')
  • 'Model Rules' (to make registration quicker and cheaper) are more readily available for co-operatives than for community businesses, but this is changing.
  • Registration is dearer and slower than for Companies
  • Banks, accountants etc. have a limited understanding of this structure

What about becoming a charity?

Charitable status is not a legal structure in its own right: it is an "overlay" on the legal structure you form, and should be considered separately. You can adopt charitable status after setting up a legal body; you can even be unincorporated yet still apply for charitable status. There are two sorts of charities: A Registered Charity is approved and given a number by the Charities Commission; Exempt charitable status is granted by the Inland Revenue, usually to organisations with very low incomes or to those with a certain legal structure (eg IPS), or in certain parts of the UK (eg Scotland). Once you have adopted charitable status it is difficult to get rid of.

There are pros and cons to charitable status.

Pros

  • You will be able to raise funds more easily
  • You will qualify for certain charity-only grants
  • You will be seen as a bona-fide philanthropic organisation

Cons

  • It can be costly to set up
  • Charity law and accounting are complicated
  • You are limited in what you can do (trading might present difficulties)