Legal Structures and Governance

Rachel Gwynne and Emma Fitzgerald

2nd February 2010

Introductions

Rachel Gwynne – Associate

Emma Fitzgerald – Trainee Solicitor

Overview of today

Thinking about various legal structures

Spotlight on the CIC model

Considering governance and effective Boards

Legal Structures and Governance

Part 1

Legal structures

Does it matter?

Yes it does, because it affects: what you can do liability how the group can hold money or

assets who will fund you and how

Choosing the right vehicle

Where do you want to go?What are your options?How should you decide?

Where do you want to go? What do you want to achieve through the

your organisation:

tradingenterprise developmentholding assetscommunity engagementa long term presence

Consider your aims in principle before you choose a structure

Where do you want to go? Key issues – do you want to:

employ staff?enter into contracts?own property?provide or procure services?

... independently, without risking personal liability to members

If so, then you will probably need a separate vehicle

What are the options?Profit distributing structures

Companies limited by sharesIncluding PLCs

Limited Liability Partnerships

Industrial and Provident SocietiesCo-operatives

Community interest company ltd by shares

What are the options?Non profit distributing structures

Companies limited by guarantee

Industrial and Provident SocietiesCommunity benefit Societies

Community interest company limited by guarantee

Charitable status?

What are the options?

If an organisation isn’t any of those, then in law its probably an “unincorporated association” - an association of two or more people “for common purposes” (but not business) with shared duties and obligations, in an organisation with rules.

- Or a “sole trader” or “partnership” (if its about business).

So, how do you tell? Look at the constitution (if there is one)

Search the Companies House website

Search the Charity Commission website

Search the register of industrial and provident societies http://mutuals.fsa.gov.uk/

So, how do you tell?

If it isn’t a company, an IPS or a charity …

then its probably an unincorporated association (if its not about business)

or a sole trader or a partnership (if it is)

Don’t worry about labels

“Social Enterprise” “Community Development Trust” “Community Enterprise”

… don’t worry too much!

Basic options the same

Company Limited by Guarantee

Registered by the Registrar of Companies

Separate legal identityAny property or contract is entered into in the company (not the members') name

Accounts, returns and information filed with Companies House

Can be charitable or a Community Interest Company

Company Limited by Guarantee

Common vehicle for non-profit making organisations

No shares; Members give £1 “guarantee”

Gives limited liability to members

Can hold assets

Can enter into contracts in its own name

Company Limited by Guarantee

Straightforward to set upSet of standard documents to accompany

the main constitutional document

FlexibleMemorandum and Articles of Association

can be "tailor made"Process exists for changing constitution if

needed

Can be charitable or a CIC

Industrial and Provident Society

Two main types:Co-operatives; andBenefit of the Community (“Ben-Com”)

Co-ops: for the benefit of those who join it as a member

Ben-Coms: organisations set up to benefit people in a particular area; person can benefit from a Ben-com even if he/she is not a member

Regulated by Financial Services Authority

Industrial and Provident Society

IPSs can now have asset lock, similar to CIC asset lock

Must have “special reasons” to set up a Ben-Com rather than a company

Ben-Coms can be charitable

Generally higher set up costs than companies

NB community investment – some useful key features

Charitable Status

In order to be charitable, an organisation must be “established for charitable purposes”

“Charitable purposes” means purposes which are “exclusively charitable according to the law of England and Wales”

13 listed in the Charities Act 2006 but a wide range in practice

Charitable Status Some social enterprises are charities

Some helpful charitable purposes: Urban or rural regeneration Community capacity building Relieving unemployment

Health warning – Charity Commission guidance!

But what about activities?

Charitable Status

Tax treatment different to normal companiesExempt from most forms of Corporation

TaxOther tax advantages

Access to sources of funding

Restrictions on trading

Regulated by Charity Commission

“Burning the bridge”

Community Investment

Community share issues (equity)

Community bonds (debt based)

Companies limited by guarantee cannot issue shares

CICs ltd by shares and Community Benefit Societies can

Community Investment

Some important features of Community Benefit Societies:

One member one vote (however many shares)Withdrawable share capital (not just

transferable)£20,000 investment limit for individual membersAnd therefore, exemption from some FSA

regulations in relation to share issues

Unincorporated Associations

A group of people with a defined purpose

Will have some rules, even if not written

Residents’ associations, sports and other clubs, trade unions, event committees …

Need not be of benefit to wider community

Unincorporated Associations

Some of the implications:

The organisation has no separate legal identity

But:

the members will still have duties and liabilities to each other

… and potentially to other people

Trading issues

What do we mean by a trading company?

When might you want to set one up?

What legal form do trading companies take?

What are the issues in forming a group structure?

What is a trading subsidiary?

A company (or other corporate entity)

Which is:

Separately registeredBut wholly or mainly owned by another

company (the “parent”)And forms a group structure with that

parent

Distinction from joint ventures

When might you want one?

If you are a charity and:You are restricted by the rules on charities

and trading; orYou want to do non charitable things

If you want to:Set up something new; orMove into a risky business area; andYou want to contain the risk

When might you want one?

Charities and trading

Trading is:The sale of goods or services

But not:The sale of donated goods, given to the charity

for selling onThe sale of investmentsThe sale of assets used by the charity for its

charitable purposesThe letting of land or buildings without services

When might you want one?

Charities CAN engage in some trading:

Where it contributes directly to the meeting of their objects (“primary purpose” trading);

Where it contributes indirectly (“ancillary” trading);

A limited amount of trading purely to raise funds, provided there is “no significant risk” to the charity – NB tax issues

What legal form do trading companies take?

Often (but not always) a company limited by shares, with the parent company owning all or a majority of the shares

Can be a community interest company (CIC)

NB charities can now jointly own a trading company and both benefit from the gift aid provisions

What are the issues in managing two companies?

Have to run the subsidiary as a genuinely separate companyTwo boards of directors – some distinct

membershipMore meetingsAdministration, consolidated accounts

Funding issuesOther investorsFunding from the parent

The relationship can get complicated!

Legal Structures and Governance

Part 2

Community Interest Companies

Fairly new legal form for social enterprise (since 2005)

CIC registration: CIC regulator “Community benefit” Annual Community Interest Report Standard/required provisions in M&A Asset lock No tax breaks

Community Interest Company

“Community Benefit”

Community Interest Test (s35(2) Companies Audit, Investigations and Community Enterprise) Act 2004

“A company satisfies the community interest test if a reasonable person might consider that its activities are being carried on for the benefit of the community or a section of the community”

Community Interest Company

The Asset Lock

CIC can dispose of any asset at market value CIC can dispose at less than market value to

another ‘asset-locked’ body - mainly charity or another CIC

Some distribution allowed in share CICs (see below)

otherwise assets and income must be used for objects of CIC: no asset-stripping.

Community Interest Company

The dividend and interest caps

Recent changes announced by CIC Regulator following review (in force 6 April 2010): overall cap – no more than 35% of distributable profits

can be passed to shareholders (remains the same);

dividend cap on individual shares – 20% of the paid up value of a share (was BoE base rate plus 5%); and

Interest on performance-related loans – cap also amended to 10% of average amount of CIC’s debt (was 4% over BoE base rate)

How do you make the choice?

Assess what you want the vehicle to do Do you want to give out profits to members or

investors, or is it not for profit? Is it likely to have only charitable aims? Is it likely to carry out only charitable

activities?Trading?

Are the tax advantages going to be important?

How do you make the choice?

How certain are you – do you need to retain flexibility?

How are you going to raise funds?

With us so far?

Time for a break!

Legal Structures and Governance

Part 3

Effective Governance

• Two pronged approach to effective governance:

Legal / procedural documents and policies

Training / soft skills

Documented Governance is …

a framework for action

a means to an end

protection

a way of working together

What is a constitution for?

Organisations are not like people! They need constitutions to:

tell them how to do things give them some certainty protect the members

What is a constitution for?

Most constitutions have to meet external requirements

Company constitutions Charity constitutions CIC constitutions Co-operatives and “ben-coms”

The key elements of a constitution

What is this organisation?

Name

Aims and core purpose

Powers

Profit making or non profit making

Equal opportunities statement

The key elements of a constitution

Membership

Who are they

How do they become members

Different groups?

How are they removed

The key elements of a constitution

Management

Committee / Board

Who is on the Board, how do they get there

Any categories / criteria (eg residents, stakeholders)

How long are they on for, how do you get them off?

Officers?

The key elements of a constitution

Meetings

Members / Board

How often?

Quorum

Voting

Minutes

The key elements of a constitution

Other key elements

Delegations – committees, working groups

Changing the constitution

Dissolution

Conduct of Board members

Other useful governance tools

Complaints procedure

Code of conduct

Terms of reference for sub groups

Scheme of delegations

Financial rules

See NCVO’s Code of Good Governance - free from www.ncvo-vol.org.uk)

Training / Soft Skills

• Effective listening and communication

• Effective decision making

• Collective responsibility

• Collective problem solving

• Chairing skills

Any Questions

Legal Structures and Governance

Thanks for listening!

Rachel Gwynne and Emma Fitzgerald0121 214 3532

rachel.gwynne@anthonycollins.comwww.anthonycollins.com

2nd February 2010