Constitutions and Legal Status

This Information Sheet gives a short overview of:

• constitutions
• different legal structures for groups
• the differences between them and pros and cons of each one.

The information given here is very broad owing to the complexity of the subject and you may find you still need to seek more detailed advice. A list of helpful agencies is offered at the end. Additionally, the information is based on legal structures for England and Wales. Legal structures and procedures may differ slightly in the Republic of Ireland, Northern Ireland and Scotland. Groups in these countries will need to check and seek additional advice to supplement the information in this briefing.

What is a constitution?

A constitution is a legal document setting out:

• What your group does, its aims and how it intends to achieve them
• How decisions are made
• Who your group serves / is accountable to.

Why do we need a constitution?

When many groups first form, they bring people together informally to share an activity or an interest. At this point most won't have a formal constitution. But as soon as the group starts handling money or property, or trying to raise money either as loans or as grants, a formal statement of decision making practice, responsibilities and rules for those participating in the groups activities is necessary. Without a constitution groups are unlikely to be able to access any kind of public or charitable funding.

As well as this, constitutions map out the structure of a group, enabling it to grow and develop within a well-defined framework that makes sure it continues to do what it set out to do. For fundraising purposes a constitution demonstrates that there is a structure and decision making process in place to make sure any money raised by, or given to the group, can be accounted for and is used for the purposes it was given.

What's in a constitution?

No two constitutions are exactly the same, but they all give the same essential information:

• The name of the organisation
• Its objectives - what the organisation is set up to do
• Its powers - how the organisation will do those things
• Its areas of benefit - who the organisation serves
• Procedures for running the organisation - how themanagement board will run it and what arrangements there are for meetings, voting, managing money etc
• Dissolution - instructions on what happens if the organisation stops operating

Writing a constitution

You don't have to be a legal genius to write a constitution, but being familiar with other constitutions is useful. Once you have decided on the type of legal structure appropriate to your group, talking to other groups with similar structures and people who've been through the process before can be a great help. Essentially you have three options:

• Adopting a model constitution
• Adapting an existing constitution from a similar type of organisation
• Writing one from scratch

Model constitutions are available from the Charity Commission http://www.charity-commission.gov.uk/common/applyforit.asp#5

These include:

• Model constitution GD3
• Model trust deed GD2
• Model memorandum and articles of association GD1

Constitutions: your options in a nutshell

To help you make your decision on the most appropriate type of structure for your organisation you should consider:

• Risk - to the Trustees, to the organisation;
• Accountability - formal structures require a high level of accountability compared to informal associations;
• Cost - of setting up the organisation, of annual reporting requirements etc.

Other factors, such as privacy, may also affect your decision. Unincorporated associations offer little protection to individual members against risks such as financial liability and any kind of legal action brought against the association. However, in reality the exposure to risk is minimal so long as the management committee acts responsibly and the finances of the organisation are managed well. Remember that constitutions can be changed, although sometimes this is expensive. It is possible to start out as an unincorporated association and then change your constitution as you grow and develop.

1. Unincorporated Association

What it is
An unincorporated association is a group of people agreeing to abide by certain rules to further the interests and activities of the group. It is not a legal entity in its own right, but a collection of individuals. As such it cannot own property, take out loans or raise funds as an organisation. Because of this individual members may be exposed to risk, for example any monies borrowed on behalf of the organisation would have to be repaid by the person who organised the loan, should the group cease to exist or run into financial difficulties. It is possible to spread any risk by agreeing that all members of the management committee carry any risk for the group as a whole.

Advantages

• Quick and cheap to set up
• No official bodies need be involved
• No legal fees
• Retain independence
• Easily wound up
• Can also have charitable status
• Easy to revise constitution

Disadvantages

• Not recognised as a legal entity in its own right
• Individual members are responsible for any loans, property, or contracts and carry the risk for the organisation
• If any action is taken against the group, it is taken against individual members not the organisation

Most appropriate when

• The organisation is small and has few assets
• The organisation has a membership
• The management committee (executive committee) are elected and hold office for a fixed term
• The objects of the organisation are carried out wholly or partly by the members on a voluntary basis

2. Charitable Trust

What it is
A small group of people (the trustees) who administer and hold legal ownership of the organisation's property (money, land, equipment etc) and administer it for the purposes the trust was set up. The trust establishes a formal relationship between the donors of money or property, the trustees who manage the money or property and the beneficiaries, the people who will benefit from the trust.

Advantages

• Can be set up quickly and cheaply
• Small trusts are cheap to administer
• If there is provision for amendments to the Trust Deeds
• these can be made quickly and cheaply
• Trustees can acquire and manage property on behalf of the Trust

Disadvantages

• Trusts must register with the Charity Commission and so are restricted to the activities they can be involved in (ie they need to fulfil all the requirements set out for charities by the Commission - see below)
• Trusts are generally non democratic
• There are not usually members
• Trustees can only be removed if the Trust Deed allow it, trustees often have an unlimited term of office
• There is no protection against the personal liability of the trustees unless the Trust is also a Company Limited by Guarantee or as an Industrial and Provident Society.

Most appropriate when

• The organisation has assets to look after, such as a property or endowment
• The money raised by the trust has clearly defined beneficiaries.

3. Company Limited by Guarantee

What it is
A company is a legal entity in its own right and considered in the eyes of the law to be like a person. It can enter into contracts or own property and does not need committee members or trustees to act on its behalf. Unlike a commercial company, a charitable company does not distribute profits to members, all the money and property belonging to the company must be used for charitable purposes. All members must agree to pay a nominal sum, usually £1, if the company becomes insolvent. [See Incorporation for further information]

Advantages

• The organisation can buy and sell property in its own name
• The organisation may take legal action in its own name
• Members and members of the management committee are protected against personal liability
• Usually democratic
• The structure is suitable for all sizes of groups
• Has a membership
• Enables the organisation to borrow money easily
• Quick, cheap and easy to set up

Disadvantages

• Must abide by rules and regulations set out in law (the Companies Act) See www.opsi.gov.uk
• Must submit annual returns and accounts to the Registrar of Companies, [See www.companieshouse.gov.uk] for which there is a charge
• Lack of privacy, lists of members, directors and accounts are open to public scrutiny
• Bureaucratic, as any changes to directors or ownership of property such as mortgage agreements must be sent to the Registrar of Companies
• You will need the expertise of a legal adviser to help set up and run your company.

Most appropriate for

• All types of organisation needing to raise and manage funds
• Membership organisations
• Large organisations
• Organisations employing large numbers of staff
• Organisations with contractual agreements to deliver services
• Organisations owning land or property.

4. Industrial and Provident Society

What it is
A mutual society set up for the benefit of members and distributing any profits to its membership. These organisations usually operate in an industry, business or trade.

Advantages

• Like companies limited by guarantee, these types of organisation are incorporated and protect members and committee members from personal risk
• These societies do not have to notify the Registrar of Friendly Societies about any changes to the committee
• Democratic.

Disadvantages

• Registration can be time consuming, complicated and expensive
• Registration involves loss of privacy and accounts must be available to the public
• It is expensive to amend the constitution
• Industrial and Provident Societies cannot register for charitable status with the Charity Commission.

Most appropriate when

• The organisation is involved in business, trade or industry.

5. Charitable Status

What it is
A group is charitable if all its aims and objects as stated in its constitution are charitable. There are four categories of charitable objects recognised by the Charity Commission:

• The relief of poverty
• The advancement of religion
• The advancement of education
• Other purposes beneficial to the community

To register as a charity with the Charity Commission, you must have a constitution and your objectives s must be charitable.

Advantages

• Tax benefits
• Opportunity to apply to trust funds restricted to registered charities only
• Advice and information from the Charity Commission
• Credibility with the public and funders
• Rate relief on any building used wholly or mainly for charitable purposes

Disadvantages

• Restrictions on political activity, campaigning and involvement in party politics
• Restrictions on the charity's ability to trade
• Research by the charity is expected to meet standards in its methodology and sampling, to make sure any research is objective
• Committee members must not gain personal benefit from their charitable activities, so committee members cannot be employees
• Charities lack privacy.

A small group with an income of less than £1,000, holding no land or property and with no permanent endowment, does not need to apply to register with the Charity Commission.

Reviewing and Revising an Existing Constitution

Reviewing your constitution is recommended every two years or so. A constitution is a working document and if you find you don't refer to it, no one ever reads it or works with it, it is unreadable or difficult to understand, it is probably time you changed it!

A checklist of questions that may be useful to groups reviewing their constitutions is available on the VAN website and in Way Ahead (see Further Information). Your answers may indicate that you need to revise your constitution or change your legal structure to one more appropriate to your current activities and needs.

For example:

• Are you confident your legal status is appropriate?
• Do you have charitable status?
• Where is your constitution or governing document?
• Is this the same as the one filed with statutory agencies?
• Are your aims and objectives clearly set out in this constitution?
• Does it include all amendments to date?
• Does it outline how new committee members are appointed?
• Are the Chair, Secretary, Treasurer and other officers elected each year?

Further Information

Charity Commission
www.charity-commission.gov.uk
The Charity Commission have three offices. If in doubt phone any office and ask for the correct contact.

London
Harmsworth House, 13-15 Bouverie Street, London, EC4Y 8DP (09.00-16.30)
T: 0870 333 0123
F: 0207 674 2300
minicom: 0870 333 0125

Liverpool
20 Kings Parade, Queens Dock, Liverpool, L3 4DQ (09.00-16.30)
T: 0870 333 0123
F: 0151 703 1555
minicom: 0870 333 0125

Taunton
Woodfield House, Tangier, Taunton, Somerset, TA1 4BL (09.30-16.00)
T: 0870 333 0123
F: 01823 345003
minicom: 0870 333 0125

Companies House
www.companieshouse.gov.uk

The number for Wales, Scotland and England is 0870-333 3636

England / Wales:
Companies House, Crown Way, Cardiff, CF4 3UZ

Office of Public Sector Information www.opsi.gov.uk

Independent Theatre Council
ITC offer an incorporation service. There may be a small fee involved.
Tel: 0207 403 1742

WAY AHEAD - VAN's toolbook to help voluntary organisations assess how they are doing, plan for the future and develop their work. Cost: between £50-£100 depending on organisation status and turnover