What it means to be unincorporated
Being unincorporated means that the organisation has no separate legal identity of its own. The full risks and liabilities involved in running the organisation or business are taken on by the individuals who own and/or manage it. That means that those individuals enter into obligations, such as contracts, on behalf of their organisation and they are responsible for its debts and other liabilities. If you are on the management committee of an unincorporated association your personal assets are at risk if the assets of the business are not sufficient to cover all the debts and liabilities.
Incorporation allows an organisation to limit the personal risk of its members. Therefore the triggers for incorporation are often that an organisation is taking on risks. The following are some examples of things an organisation might do which would increase the risks associated with it:
Unincorporated Legal Forms
The most common unincorporated legal forms used by charities, social enterprises and co-operatives are:
What is an unincorporated association?
An unincorporated association is an organisation made up of a group of individuals, who have decided to come together for a particular purpose. The individuals are described as members of the association. It usually has a written constitution which sets out various details including how members are appointed and removed and how meetings are held amongst other things. An unincorporated association usually has a management committee elected by the members
Since it is unincorporated, it does not have limited liability. The individuals involved will be personally liable for the debts of the association.
What is a trust?
In the voluntary and community context, a trust is established when a donor gives an asset (usually money) to a group of individuals (trustees) and asks them to use it for a particular purpose. In general, for the trust to be legally enforceable, that purpose needs to be charitable. Charitable trusts are subject to slightly different rules from private family trusts.
The agreement between the donors and the trustees is set out in a "trust deed". This usually also sets out how the trustees are appointed and removed and how meetings are held amongst other things. A trust does not have members.
A trust is unincorporated and so it does not have limited liability. The trustees will be personally liable for the debts of the trust.
Benefits of incorporation
There are a number of benefits if you incorporate:
1. Legal personality
An incorporated business is a legal entity in its own right. This means that it can enter into contracts, employ staff, lease property and have its own obligations and liabilities.
2. Limitation of risk
Incorporation limits the personal liability of the individuals involved. Incorporation is an important consideration if the organisation intends to employ any staff, take on significant property interests or undertake major contractual obligations.
3. Clear ownership structure/governance
Unincorporated organisations can operate relatively informally, being governed only by their constitutions. However, this means the powers and processes for decision making can be unclear. Incorporation involves the formalisation of governance structures within a legislative framework.
4. Developing a sense of ownership
Incorporation provides an established formal structure for some types of stakeholder involvement.
5. Public accountability
With limited liability comes regulation and disclosure requirements, which can increase public confidence in the company. Limited companies and charitable incorporated organisations have to have a registered address, file their constitutions, annual accounts and prescribed details of their directors etc.
6. Recognition by financial institutions and investors
Many banks and financial institutions will insist on incorporation before providing loan finance.
Different forms of incorporations
There are different forms of incorporations that an organisation can adopt. The main forms are Community Interest Company, Company limited by shares, Company limited by guarantee and CIOs.
Companies can be either limited by shares (CLS) or limited by guarantee (CLG). Community interest companies (CICs) are a type of company and can be either CLS or CLG.
CLGs are traditionally associated with charities, trade associations and not-for-profit organisations. CLSs are divided into private companies (which make up the great majority) and public limited companies (plcs) which are subject to particularly stringent accounting standards and can offer their shares to the general public. Many (but not all) plcs are listed on the stock market so that their shares can be easily bought and sold. Although there are some plcs that are social enterprises they will very rarely be listed.
CICs operate in a broadly similar way to normal companies, except in certain aspects. The principal feature of a CIC is that it contains a lock on its assets. This prevents profits being distributed to members or shareholders other than in certain circumstances. A CIC is obliged to pursue the community interest and must report on how it does this to the CIC Regulator.
The CIO is intended to have all the advantages of incorporation, namely limited liability and the ability to hold assets in its own name, without the burdens of dual registration and requirements to comply with two sets of law, as the CIO is regulated solely by the Charity Commission.
For more information on legal forms see our guidance:
For more detailed information on the pros and cons of incorporation of charities, we suggest this document: https://getlegal.bwbllp.com/products/pros-and-cons-of-incorporation
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