NPO Legal Structures

Whether you choose to operate as a charity or not, you  must chose an appropriate legal structure -  a set of rules (as laid down by the law) which determine how you govern and run your organisation.

 

In the eyes of the law legal structures are either unincorporated or incorporated.

 

Incorporated organisations are entities that are independent from the owners, while unincorporated businesses are simply extensions of their owners.

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Basically, this means that owners of unincorporated organisations  are generally personally liable for the business’s debts and liabilities in the event of insolvency, while the owners of an incorporated organisation are generally not liable for the debts and liabilities of the organisation.

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There are six main legal structure types for social purpose organisations  each prescribing different rules relating to key matters like personal liability for business debts , working with others, filing accounts and returns, public accountability, etc.

 

NPO legal structures are  sub divided into  unincorporated or incorporated as described below:

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UNICORPORATED LEGAL STRUCTURES  

There two main unincorporated legal structures for NPOs as follows:

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Charitable Trusts

Charitable Trusts are organisations set up to manage property and/or to receive money donated for a specified charitable purposes for the benefit of a wider community or the general public.

 

he assets/money donated are held by the charity and managed /disbursed in a way approved by the donors. Charitable Trusts are run ,undemocratically, by small management committee (known as trustees)who will usually report to (and consult with) the beneficiaries on a regular on the how the assets are being  (or should be) managed.

 

All charitable trusts will need to register with the charity commission if their annual income is over £5,000 per annum.

 

Unincorporated Associations

Unincorporated Associations are organisations where a group of individuals come together   for any reason/purpose other than to make a profit. They are in effect, membership bodies, who simply draw up a constitution setting out the rules on how the organisation will be run If the purpose falls under one of the 13 charitable purposes then the organisation will be classified as a charity and will need to register with the charity commission if  their annual income is over £5,000 per annum.

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INCORPORATED  LEGAL STRUCTURES         

There are four main incorporated legal structures for NPOs as follows:

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Companies

Companies are incorporated bodies/organisations that have voting members as the owners. They are run by one or more directors (who may or may not be the voting members) who are usually paid by the company to run the organisation.

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There two main types of companies – Companies Limited by Guarantee and Companies Limited by Shares.

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O The Companies Limited by Shares 

Companies limited by shares are companies where the members purchase and own portions of the company called shares

Generally, the more shares held by a person the more control and rights to profits that person has. Profits are distributed to these shareholders (in proportions to held shares) after paying tax on the profits.

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O The Companies Limited by Guarantee

Companies Ltd by Guarantee (CLGs), on the other hand, are owned by one or more guarantors ; each who agree to guarantee a fixed sum (usually a nominal amount like £10) to the creditors in the event of insolvency. Since there are no shares in CLGs, profits are not usually distributed to members but instead reinvested back into the organisation.

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This is what give CLGs their huge not for profit credentials and extensive use in the `third sector`.

 

All companies are registered with and regulated by Companies House who monitor their  activities via various annual returns.

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Community Interest Company

Community Interest Companies are basically limited companies with a number with extra regulatory features such as a community interest test (which defines the community being served), an asset lock  (which ensure the organisations assets are used for community being served) and a cap on dividends(which limits the amount private investors can take out of the business).

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The idea is to encourage social entrepreneurship in the UK by providing a regulated environment for investors with a social conscience to invest funds and receive a return on their money (albeit capped) with confidence.

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Charitable Incorporated Organisation (CIOs)         

CIOs are legal structures that enable charities to register directly with the charity commission as an incorporated body thereby accessing all the benefits of an incorporated body and a charity.

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There are two version of the legal structure - the Association Model and Foundation Model.

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O The Association Model

The Association Model CIOs are designed organisations that want a wide voting membership to appoint the trustees/management(for fixed terms) and have the final say on certain critical decisions affecting the organisation.

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O The Foundation Model                                                                                                                                                                      The Foundation Model CIOs, however, are ideal for those organisations that want to be run by a small group of appointed trustees who will make all the key decisions and decide on the new trustees.

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CIOs are regulated by the Charity Commission itself who have sole responsibility for their administration.

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Industrial Provident Society (IPS) 

An IPS is a trading organisation that operates using  the cooperative principles/values  ( self-help, self-responsibility, democracy, equality, equity, and solidarity)to benefit of it`s members or the wider community.

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As such there are two types - cooperative societies or a community benefit societies.

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O Cooperative societies

Cooperative societies are organisations run by and for the benefit of its members (usually a set of workers, consumers or members of an organisation) who all participate in the business some way or another. The main aim of a co-operative society is not to make money but to ensure profits are kept within the organisation in order to finance the growth of the organisation and reward members for their efforts.

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O Community benefit societies

Community benefit societies are run for the benefit of the community at large or people other than its own members. Profits must also be used to benefit the wider community it is serving rather than being distributed to members like a co-operative society.

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Both types of societies are normally funded by a special form share capital where each share has a fixed value (which never fluctuates) with interest paid on them instead of dividends. Anybody buying  a share confirms their membership of the organisation and one person can own more than one share subject to certain limits.

 

However, decisions are taken on a one-member-one-vote basis  regardless of number of shares owned individually.

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Get Help Deciding                  

If after reading the  relevant guide you are still not sure which type of NPO legal structure is best for you can contact us and one of our experts will provide  you with further guidance. If you already have an up and running organisation, we can look at what you are currently operating as and see whether you need to make any changes based on your current circumstances and/or future plans.

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