When setting up a voluntary organisation, important considerations are whether to incorporate the organisation as a company and whether it should be registered as a charity. We set out what is involved in each decision.
The majority of voluntary organisations start out as unincorporated organisations, that is: a group of people bound by a common purpose and a set of rules. But as they grow they may find that this is no longer the most appropriate structure for their organisation.
While being unincorporated has the advantage of being simple and flexible there are disadvantages. The main one being that because it has no legal personality the organisation cannot enter into contracts, leaving the committee members personally liable if things go wrong. Therefore if you employ staff, have a lease on a property or any substantial contract then you may want to consider registering as a company.
By incorporation we mean company formation. Examples of companies in the UK include public limited company (PLC), limited liability partnership (LLP), and private company limited by shares (limited, ltd). Not all forms of company are suitable for voluntary organisations though. The most commonly chosen form by voluntary organisations is a private company limited by guarantee but for organisations intending to trade or charge for services there are other options such as a CIC (Community Interest Company) or CIO (charitable incorporated organisation).
Advantages of incorporation:
For most organisations the big advantage is the limited liability it provides to the members of the organisation and its governing body meaning that if it cannot pay its bills then it is not the personal responsibility of the governing body. Creditors can take legal action against the company not the individuals.
Legal personality: once incorporated an organisation can enter into contracts, hire staff, rent or own property, take legal action and be sued. It is considered to be a legal person.
Permanent succession: there is no need to transfer contracts, leases or other legal agreements to new signatories whenever the persons who signed them cease to hold their positions in the organisation.
Permanence: It continues to exist until formally dissolved unlike an unincorporated organisation that can simply fade away. This is generally an advantage but can be a disadvantage if the final governing members forget it exists and fail to comply with their duties.
Disadvantages of incorporation:
Cost: Incorporation is likely to involve legal costs
Paperwork: because of the limited liability and public accountability, incorporation involves detailed paperwork
Public access to records: information about a company’s directors is publicly available at Companies House and its website
There are limitations on limited liability, in some circumstances the governing body may still be liable if for instance they act outside their powers or they allow the organisation to continue to operate while insolvent.
Winding up: there is a formal process to go through if the company is to be wound up
You should consider incorporating if:
Your organisation employs or expects to employ staff
You own land, buildings or substantial assets
You are involved or intend to become involved in activities, leases or contracts
where there is financial risk
If you find it difficult recruiting trustees or committee members because they
do not want to accept the liability that comes from being unincorporated
But, if your organisation...
does not employ staff, have any long term leases, own property or have any
does not expect to last a long time
does not have the resources to comply with paperwork, (although if it is charitable it will have to deal with much of this even if not incorporated)
does not want the details of its governing body to be public
is not a charity and does not want to make its accounts public
does not want to put onto members of its governing body the extra responsibilities and liabilities involved with incorporation (this should be
balanced against the risk of not being incorporated)
...then incorporation may not be for you.
Please be aware that this article is only intended to provide an overview of this complex subject. If you decide that incorporation might be appropriate for your organisation then please seek further advice either through us or from a lawyer.