The document provides an overview of legal structures for voluntary organizations in Scotland. It discusses various legal structure options such as voluntary associations, trusts, industrial and provident societies, companies limited by guarantee, and Scottish Charitable Incorporated Organisations. For each structure, it outlines the key advantages and disadvantages. It also covers topics such as the responsibilities of company directors and issues related to achieving charitable status.

1. Introduction to Legal Structures
John Black
Business Adviser

2. Just Enterprise
Business support and development services to
enterprising third sector organisations across Scotland
Just Enterprise

3. Target Groups
• Enterprising Third Sector Organisations
• Start-up Social Enterprises
• Established Social Enterprises
• Equalities Groups
• Social Entrepreneurs
• Leaders, Managers and Staff
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4. 1-1 Business Support
• Enterprising Third Sector Organisations on training
programmes may be eligible for 1-1 Business
support
• Small scale, targeted consultancy assignments
• In-depth, strategic consultancy assignments
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5. Business Support can include
• Business Planning
• Feasibility Study
• Legal Structure
• Marketing Plan
• Operational Review
• Costings for procurement/tendering
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7. Apply for support now at
www.justenterprise.org.uk
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8. Introduction to Legal Structures
John Black
Business Adviser

9. Overview
• Raise awareness and knowledge
• Review legal structure options
• Identify key charitable issues
• Identify directors responsibilities
• Introduce Code of practice on Good
Governance
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10. What stage of development is your
organisation currently at?
Discussion – issues to consider
• Type of work you do
• Management, staff resources and track record
• Any major liabilities e.g. Building, staff
• Predictability of your future
• Current funding mix
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11. Legal Structures for
Voluntary Organisations
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12. Types of legal structure: Overview
• Voluntary association
• Trust
• Industrial & Provident Society (Community Benefit Society or
Bone-Fide Co-operative)
• Company limited by guarantee
• Company limited by shares
• Scottish Charitable Incorporated Organisation (SCIO)
• Limited liability partnership (LLP)
• Community Interest Company (CIC)
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13. Types of Legal Structure:
Advantages/Disadvantages
• Voluntary association
– No formal registration requirements (other than charity
recognition process
– Less on-going admin. (e.g. no need to notify changes in those
serving on management committee)
– Very limited legal overlay (e.g. no statutory rules for AGMs)
– Much less intimidating for people wanting to get involved
But
– Not treated as a legal entity for most purposes
– Risk of personal liability for those serving on the management
committee [a serious disadvantage]
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14. Types of Legal Structure:
Advantages/Disadvantages
• Trust
– No formal registration requirements (other than charity recognition
process)
– Less on-going admin. (e.g. no need to notify changes in trustees)
– Limited legal overlay (as compared with e.g. a company)
– Absence of member-level reduces administration
But
– Does not have full legal personality (so need to show linkage in trustees)
– Possibility of personal liability for trustees (though lower risk than in
voluntary association)
– May be regarded by funders as more exposed to abuse, since no
accountability at AGMs
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15. Types of Legal Structure:
Advantages/Disadvantages
• Industrial & provident society
– Full legal personality
– Limited liability
– Body of statutory requirements is less detailed than for companies
– Use of standard models may make formation process seem more simple
– Useful vehicle for public share issue
But
– Registration procedures are needed to form an IPS
– Registration is more expensive than company incorporation (where there
are major departures from model rules)
– On-going requirement to notify changes to the FSA
– Statutory overlay – and less flexible than for companies
– IPS structure is unfamiliar to lawyers, many banks etc
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16. Types of Legal Structure:
Advantages/Disadvantages
• Company limited by guarantee
– Full legal personality
– Limited liability
– Companies House provides much more up-to-date framework than
FSA
– Can be charitable or be a CIC or neither
But
– Registration procedures are needed to form a company
– There are on-going requirements to notify changes in directors,
secretary, registered office etc
– Major body of statutory and case law as overlay
– Can be intimidating (as compared with voluntary association or trust)
for those wanting to get involved
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17. Company Limited by Guarantee
• 1985 Companies Act still main legislation but
now 2006 Act as well
• Limited liability – important if you own assets,
employ staff
• Democratic structure
• Registrar of Companies
• Memorandum & Articles of Association
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18. Memorandum & Articles of
Association: Key areas
• Name – change needed?
• Objects: internal & external needs, outcomes
• 2-tier structure: members and Board
• Membership qualification
• Board composition
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19. Company limited by
guarantee Decisions on:
Members • changes to name,
objects, articles
• directions to the
board (rare)
• winding-up
ELECT • AGM matters
Board of
directors
Decisions on
management policy
Overall supervision
& control
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20. Types of Legal Structure:
Advantages/Disadvantages
• Company limited by shares
– Full legal personality
– Limited liability
– Readily lends itself to detailed tailoring in relation to decision-making
and financial returns (e.g. through separate classes of shares)
– Can be a CIC if appropriate
But
– Registration procedures are needed to form a company
– There are on-going requirements to notify changes in directors,
secretary, registered office etc
– Major body of statutory and case law as overlay
– Company will be liable to tax, so not optimum for a joint venture where
one or more shareholders are public sector bodies
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21. Types of Legal Structure:
Advantages/Disadvantages
• SCIO
– Full legal personality
– Limited liability
– Simple model rules (one-tier and two-tier)
– Limited legal overlay
– User-friendly registration process with OSCR; and single-step (near
as….) registration and charity recognition process
– Limited on-going requirements in relation to returns to OSCR
– [over time] User-friendly guidance notes available from OSCR
But
– Only available if the objects are charitable
– Will take time to build up wider recognition of what an SCIO is and why
you would choose this structure
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22. Types of Legal Structure:
Advantages/Disadvantages
• LLP
– Full legal personality
– Limited liability
– Very flexible in relation to structuring of decision-making and financial
returns (but very few models available as yet)
– The members of the LLP are taxed on their share of profits (not the LLP
itself), so much more tax-efficient than a company limited by shares in
the context of a a joint venture where one or more shareholders are
public sector bodies
But
– Registration procedures are needed to form an LLP
– There are on-going requirements to notify changes in members etc
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23. Types of Legal Structure:
Overview (cont.)
Community Interest Company (CIC)
• A type of company; a CIC can be either a company limited by
shares or a company limited by guarantee
• A company that is a CIC will have “C.I.C.” (or “Community Interest
Company”), not “Ltd”, at the end of its name (if it is a plc, the name
will be “…..Community Interest plc”)
• A CIC must satisfy the “community interest test” i.e. it must carry on
activities which are for the benefit of the community (or a section of
the community)
• A CIC cannot have charitable status, even if its objects are
charitable

24. Types of Legal Structure: Overview
(cont.)
• A CIC cannot distribute profits beyond a limit (“the dividend cap”)
set by regulations; but that limit does not apply to distribution of
profits to a charity
• Any surplus assets remaining on the winding up of a CIC must not
be paid/transferred to its members (except – in the case of a
company limited by shares – to the extent of the amount paid up
on the shares); the surplus assets have to be paid/transferred to
other CICs or to a charity or charities
• A CIC has to issue an annual report describing the manner in
which the company’s activities during the financial year have
benefited the community
• A company can be formed as a CIC; alternatively, an existing
company can convert to a CIC

25. Types of Legal Structure:
Advantages/Disadvantages
• CIC
– badges the business as sitting within the social enterprise
sector (or, in some cases, quasi-public sector)
– allows people setting up the enterprise to retain control but
within a social enterprise model (not possible for employee-
directors to have majority control in a charitable company)
– may be more acceptable to funders than a conventional private
sector model (though will take time for funding criteria to adapt)
– may be an attractive vehicle for private sector investment
– But
– Does not carry with it any tax advantages
– Not yet widely recognised
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26. Core Governance, Roles &
Responsibilities of Company
Directors

27. Charities: issues
• Main benefit likely to be funding access
• ‘public benefit’ test
• 2005 Act: 15 charitable aims
• Documents to OSCR: 2005 Act laid down more
formal obligations
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28. New Definition of a Scottish Charity
• A body meets the charity test if
– its purposes consist only of one or more of the charitable
purposes
and
– it provides (or intends to provide) public benefit in Scotland or
elsewhere
unless
its constitution allows distribution (on a winding-up or at any
other time) for a non-charitable purpose; or its constitution
expressly permits the Sc Ministers (or a Minister of the Crown)
to direct/control its activities (unless disapplied); or it is (or
advances) a political party
For the purposes of s505 ICTA 1988, “charity” means
– a body of persons established for charitable purposes only
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29. New Definition of a Scottish Charity
(cont’d)
• FIRST PART OF THE TEST - the 15/16 charitable
purposes:
(a) The prevention or relief of poverty
(b) The advancement of education
(c) The advancement of religion (or philosophical belief)
(d) The advancement of health (inc. prevention/relief of sickness,
disease or human suffering)
(e) The saving of lives
(f) The advancement of citizenship or community development (inc.
urban or rural regeneration, promotion of civic responsibility,
volunteering, the voluntary sector or effectiveness/efficiency of
charities)
(g) The advancement of the arts, heritage, culture or science
(h) The advancement of public participation in sport (if physical skill &
exertion)
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30. New Definition of a Scottish
Charity (cont’d)
(i) The provision of recreational facilities, or the organisation of recreational
activities, with the object of improving the conditions of life for the
persons for whom the facilities or activities are primarily intended
(j) The advancement of human rights, conflict resolution or reconciliation
(k) The promotion of religious or racial harmony
(l) The promotion of equality and diversity
(m) The advancement of environmental protection or improvement
(n) The relief of those in need by reason of age, ill-health, disability, financial
hardship or other disadvantage (which may include relief through
accommodation or care)
(o) The advancement of animal welfare
(p) Any other purpose which may reasonably be regarded as analogous to
any of the preceding purposes
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31. New Definition of a Scottish Charity
(cont’d)
• The new definition:
– Wording of charitable purposes slightly more in tune with modern
terminology, and slight widening of charitable field
– Difficult to determine at this stage whether public benefit test will
represent an additional barrier, or introduce greater flexibility
– Detailed approach will be built up through OSCR policy/practice
(currently, general guidance through “Meeting the Charity Test”
document; detailed guidance on particular objects and public benefit
test likely to be issued in stages, possibly in line with review of existing
charities)
– Approach taken by OSCR will, over time, be modified and
supplemented by decisions of Scottish Charity Appeals Panel
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32. Practical Implications for Existing
Scottish Charities
– All Scottish charities will be required to file annual accounts and an
annual return; larger charities (gross income over £25k) will require to
lodge more detailed monitoring return
– Scottish charity register will be available for public inspection
– Commitment by OSCR to adopt proportionate approach to annual
returns
– Also duty on OSCR to review all entries on the Scottish charity register
– Active review process should reduce incidence of irregularities/abuse;
wider powers should facilitate more effective action where abuse is
uncovered
– Non-Scottish charities operating in Scotland will require to be entered in
the register
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33. Practical Implications for Existing Scottish Charities
• Prior consent of OSCR will be required in relation to: change of
name, adjustment to objects clause, amalgamation, winding
up/dissolution
• Certain other changes require to be notified to OSCR: any change
to the charity’s principal office (or, if no office, then name/address of
charity trustee who acts as key contact), constitution, any other
details set out in its entry in the register, change of
objects/amalgamation, winding up/dissolution, administration order/
appointment of receiver
• Specific duties are imposed on charity trustees
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34. Legal Responsibilities of
Directors
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35. Legal Responsibilities of Directors
• Key principles: company law
• New legal duties for directors of
companies with charitable status
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36. Directors’ Role & Responsibilities
under Company Law
• Role of directors
• Limitations on directors’ powers
• Duty of good faith
• Duty to exercise proper care & skill
• Relationship between the board and management staff
• Relationship between the board and outside advisers
• Statutory obligations/liabilities
• Other legal hazards
• Wrongful trading provisions
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37. Role of Directors
• To take decisions on management policy
• Generally control and supervise the activities
of the company
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38. Limitations on Directors’ Powers
• Certain matters require to be dealt with (under the
Companies Acts) by the members; directors can convene
General Meetings but decision rests with members
• Objects clause
• Restrictions in memorandum and articles (e.g. no paid
directors)
• Residual power of members to issue directions (normally
by special resolution)
• Authority of an individual director:
– power to bind the company
– liability associated with overstepping authority delegated by the
board
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39. Duty of Good Faith
• The board must always exercise the powers of the company in a
way which the board considers will best further the interests of the
company [note: slightly different test applies to directors of a
charitable company]
• Where a director has a personal interest in a proposed contract
– he/she is under a duty to disclose this
– he/she will (normally) be barred, in terms of the articles, from voting on
the relevant resolution
• A director appointed to the board on the basis of nomination by
some outside body ought, in terms of the legal principles, to take
decisions at board meetings on the basis of what he/she considers
will best further the interests of the company - even if a particular
decision is in conflict with the policy of the outside body which
nominated him/her
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40. Duty to Exercise Proper
Care & Skill
• PROPER CARE: each director has a duty to take the
same care in relation to the company's affairs as a
person would normally take in relation to his/her own
affairs [new charity legislation alters that standard
for directors of charitable companies]
• PROPER SKILL: each director has a duty to apply to
the best of his/her ability the skills and experience which
he/she actually has (the "wrongful trading" provisions
do, however, apply an objective standard)
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41. Relationship Between the Board and
Management Staff
• The practicalities of a typical voluntary sector company
are such that a high level of delegation by the board is
inevitable ... but the responsibility for overall supervision
and policy‑making remains with the board
• An appropriate balance should be struck in relation to
delegation of powers, in particular:
– the board should ensure that there are adequate reporting
procedures
– the board should keep under review the reliability and
competence of senior employees
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42. Relationship Between the Board
and Outside Advisers
• In certain circumstances it would be
irresponsible (and a breach of directors' duties)
for the board to proceed without first obtaining
outside professional advice
• It is important, however, that the board should
not follow outside advice blindly; the
responsibility for making the decision rests with
the board
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43. Statutory Obligations/Liabilities
• Company records & returns: the Companies Act
imposes responsibilities on the directors personally with
regard to the keeping of proper company records and
filing of returns with Companies House (especially
annual accounts and annual returns)
• Accounts and accounting records: the Companies
Acts impose duties in these areas on the directors
personally (now emphasised in the wording of the
auditors’ report).
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44. Other Legal Hazards
• Serious breaches of health & safety legislation
• Claims by third parties who suffer injury etc if
board is grossly reckless
• Defamation, where board is party to the issue of
the defamatory material
• Company directors’ disqualification orders
• Personal liabilities imposed under new charities
legislation; and……
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45. Wrongful Trading Provisions
• The "bottom line" in relation to these provisions is that a
director would have to pay out of his/her own personal funds
and assets towards a company's debts if it has gone into
liquidation
• Fortunately, there are a number of hurdles which have to be
gone over before the court could order this to be done; the
following circumstances would have had to apply:
– at some point before liquidation commenced, the director knew, or
ought to have concluded, that there was no reasonable prospect
that the company would avoid going into insolvent liquidation
– as from the point when the director knew or ought to have
concluded that there was no reasonable prospect of avoiding
insolvent liquidation, he/she failed to take all necessary steps to
minimise further loss to creditors
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46. Wrongful Trading Provisions
• FINANCIAL MONITORING: each director should
satisfy himself/herself that (a) the individuals
responsible for book‑keeping and preparing financial
reports are competent and reliable, (b) the accounting
systems are adequate, (c) financial information, in a
form which would show up financial difficulties, is
presented to the board on a frequent basis and (d)
he/she personally understands the financial information
which is presented to the board
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47. New Legal Duties – Directors of
Companies with Charitable Status
• Charity trustees must act in the interests of the
charity; and must in particular
– seek in good faith to ensure that the charity exercises its functions
in a manner which is consistent with its purposes
– act with the care and diligence that it is reasonable to expect of a
person who is managing the affairs of another person
– in circumstances where a conflict of interest may arise, put the
interests of the charity first (or, where some other duty prevents
that, disclose the conflict and take no part in the
deliberations/decision)
In addition, the charity trustees must ensure that the charity complies
with any direction, requirement, notice or duty imposed on it by virtue
of the Act
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48. New Legal Duties – Directors of
Companies with Charitable Status
• Breach of trustees’ duties specified above is to be treated as misconduct in
the administration of the charity
• The Act provides that where a charity trustee provides services to a charity
or might benefit from any remuneration paid to a connected party for such
services, then (unless otherwise provided in a constitution in force prior to
the Act)
– the maximum amount of the remuneration must be specified in a
written agreement and must be reasonable
– the charity trustees must be satisfied that it would be in the interests of
the charity to enter into the arrangement (taking account of that
maximum amount)
– less than half of the charity trustees must be receiving remuneration or
benefit from remuneration
– the remuneration must not be expressly prohibited by the constitution
Remuneration contrary to the above will be recoverable.
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49. Good Governance
“A Code for the Voluntary
and Community Sector”
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50. Good Governance:
Good Practice in Managing
SEOs
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51. Code of Governance
• Not mandatory
• Compliant with legal and regulatory
requirements, including those relating to
charities
• It links closely with other codes and standards
e.g. the Charity Commission’s The Hallmarks of
an Effective Charity and the new booklet The
Essential Charity Trustee
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52. Governance
• Governance is high on the agenda in all
sectors
• As voluntary organisations working for public
benefit you are increasingly expected to
demonstrate how well you are governed
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53. A Definition
• One writer on governance defined
governance as being:
“ the systems and processes concerned with
ensuring the overall direction, effectiveness,
supervision and accountability of an
organisation”
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54. Principles
There are seven main principles that underpin the
Code and supporting principles underlying each of
these is the additional principle of equality - that of
ensuring equity, diversity and equality of treatment
for all sections of the community. We see this as
fundamental to the work of all voluntary and
community sector organisations; rather than
creating a separate 'Equality' section, the principle
has been applied throughout the Code.
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55. Principles
Principle 1: Board leadership
• Every organisation should be led and controlled by an effective
Board of trustees which collectively ensures delivery of its objects,
sets its strategic direction and upholds its values.
Principle 2: The Board in control
• The trustees as a Board should collectively be responsible and
accountable for ensuring and monitoring that the organisation is
performing well, is solvent, and complies with all its obligations.
Principle 3: The high performance Board
• The Board should have clear responsibilities and functions, and
should compose and organise itself to discharge them effectively.
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56. Principles (cont’d)
Principle 4: Board review and renewal
• The Board should periodically review its own
and the organisation's effectiveness, and take
any necessary steps to ensure that both
continue to work well.
Principle 5: Board delegation
• The Board should set out the functions of sub-
committees, officers, the chief executive, other
staff and agents in clear delegated authorities,
and should monitor their performance.
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57. Principles (cont’d)
Principle 6: Board and trustee integrity
• The Board and individual trustees should act
according to high ethical standards, and ensure
that conflicts of interest are properly dealt with.
Principle 7: Board openness
• The Board should be open, responsive and
accountable to its users, beneficiaries,
members, partners and others with an interest
in its work.
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58. The Way You ‘Govern’
• The way your organisation governs will be
different depending on your circumstances
• The size of the organisation
• How long in existence
• Culture and values
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59. Good Practice Checklist
• Appropriate and transparent structures should
be in place
• Balance of skills should be right
• Be in charge
• Everyone should know what they are
responsible for and what they have to do
• Delegate jobs the committee can’t do – take on
staff volunteers or even a consultant.
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60. Good Practice Checklist
• Follow your own rules – governing document
• Keep written records of meetings - important
decisions are made
• Financial management is vitally important
• Plan to deal with problems should disputes
arise
• Prepare for risks
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61. Good Practice Checklist
• Seek professional or specialist advice when
needed – even the most qualified/experienced
committee needs advice
• Check which laws and regulations apply to
your organisation – e.g. compliance with
charity law
• Know where you are going as an organisation
- your strategy - governing document
• Make sure committee meetings are well run –
balance of skills knowledge and experience
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62. Good Practice Checklist
• Make sure conflicts of interest are declared,
recorded and dealt with openly
• Make sure any ‘payments’ to committee
members are allowable in law
• Make sure that the committee is in control
with respect to compliance with the law, its
own rules and any other regulations
• Information is key to compliance
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63. Good Practice Checklist
• Monitor the organisation’s progress against its
plans – performance targets delivered
• Keep an eye on the finances – get regular
financial reports – deal with any major
variations from budget
• Make meetings work – meet as often as you
need – Chair is most important role in meetings
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64. Good Practice Checklist
• Consult and inform all stakeholders – staff,
volunteers, funders, members and partners
• Set up ways to consult and inform
• Annual reports/accounts
• Quarterly newsletters
• Website
• Public Meetings
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65. Good Practice Checklist
• Review performance of committee
• Compare the existing skills of
committee against what is needed for
the future
• Recruit or train?
• Succession?
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66. Good Practice Checklist
• Review organisations/projects
work
• Has it achieved what it set out to
do?
• Is the work still relevant?
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67. Thank you!
Just Enterprise