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Legal Structures


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Legal Structures

  1. 1. Development Trust Association Structuring for Success David Alcock 9 th December 2009
  2. 2. Where are we going today? <ul><li>Thinking about legal structures </li></ul><ul><li>Applying that to the Trusts or groups that you work with </li></ul><ul><li>Looking at some more complicated structures </li></ul><ul><li>Reflecting on trading and charitable status </li></ul>
  3. 3. Who’s he? <ul><li>Anthony Collins Solicitors – based in Birmingham, working all over England and Wales </li></ul><ul><li>Leaders in advice to the third sector </li></ul><ul><li>Committed to community regeneration </li></ul><ul><li>Working with Development Trusts ad the DTA, including on asset transfer and governance issues </li></ul>
  4. 4. Governance is … <ul><li>a framework for action </li></ul><ul><li>a means to an end </li></ul><ul><li>protection </li></ul><ul><li>a way of working together </li></ul>
  5. 5. Legal structure <ul><li>Does it matter? </li></ul><ul><li>Yes it does, because it affects: </li></ul><ul><li>What you can do </li></ul><ul><li>Liability </li></ul><ul><li>How the group can hold money or assets </li></ul><ul><li>Who will fund you and how </li></ul>
  6. 6. Choosing the right vehicle <ul><li>Where do you want to go? </li></ul><ul><li>What are your options? </li></ul><ul><li>How should you decide? </li></ul>
  7. 7. Where do you want to go? <ul><li>What do you want to achieve through the your organisation: </li></ul><ul><ul><li>Trading </li></ul></ul><ul><ul><li>Enterprise development </li></ul></ul><ul><ul><li>Holding assets </li></ul></ul><ul><ul><li>Community engagement </li></ul></ul><ul><ul><li>A long term presence </li></ul></ul><ul><li>Consider your aims in principle before you choose a structure </li></ul>
  8. 8. Where do you want to go? <ul><li>Key issues – do you want to: </li></ul><ul><ul><li>continue to employ staff? </li></ul></ul><ul><ul><li>enter into contracts? </li></ul></ul><ul><ul><li>own property? </li></ul></ul><ul><ul><li>provide or procure services </li></ul></ul><ul><ul><li>... independently, without risking personal liability to members </li></ul></ul><ul><li>If so, then you will probably need a separate vehicle </li></ul>
  9. 9. What are the options? <ul><li>Profit distributing structures: </li></ul><ul><li>Companies limited by shares </li></ul><ul><ul><li>Including PLCs </li></ul></ul><ul><li>Limited Liability Partnerships </li></ul><ul><li>Industrial and Provident Societies </li></ul><ul><ul><li>Co-operatives </li></ul></ul><ul><li>Community interest company ltd by shares </li></ul>
  10. 10. What are the options? <ul><li>Non profit distributing structures: </li></ul><ul><li>Companies limited by guarantee </li></ul><ul><li>Industrial and Provident Societies </li></ul><ul><ul><li>Community benefit Societies </li></ul></ul><ul><li>Community interest company limited by guarantee </li></ul><ul><li>Charitable status? </li></ul>
  11. 11. What are the options? <ul><li>If a group isn’t any of those, then in law its probably an “unincorporated association” </li></ul><ul><li>an association of two or more people “for common purposes” (but not business) with shared duties and obligations, in an organisation with rules </li></ul><ul><li>Or a “sole trader” or “partnership” (if its about business) </li></ul>
  12. 12. What are the possibilities? <ul><li>How do you tell? </li></ul><ul><li>Look at the constitution (if there is one) </li></ul><ul><li>Search the Companies House website </li></ul><ul><li>Search the Charity Commission website </li></ul><ul><li>Search the register of industrial and provident societies </li></ul>
  13. 13. What are the possibilities? <ul><li>How do you tell? </li></ul><ul><li>If it isn’t a company, an IPS or a charity … </li></ul><ul><li>Then its probably an unincorporated association, if its not about business </li></ul><ul><li>Or a sole trader or a partnership, if it is </li></ul>
  14. 14. Don’t worry about labels <ul><li>“ Social Enterprise” </li></ul><ul><li>“ Community Development Trust” </li></ul><ul><li>“ Community Enterprise” </li></ul><ul><li>… don’t worry too much! </li></ul><ul><li>Basic options the same </li></ul>
  15. 15. Company Limited by Guarantee (1) <ul><li>Registered by the Registrar of Companies </li></ul><ul><li>Separate legal identity </li></ul><ul><ul><li>Any property or contract is entered into in the company (not the members') name </li></ul></ul><ul><li>Accounts, returns and information filed with Companies House </li></ul><ul><li>Can be charitable or a Community Interest Company </li></ul>
  16. 16. Company Limited by Guarantee (2) <ul><li>Common vehicle for non-profit making organisations </li></ul><ul><li>No shares; Members give £1 “guarantee” </li></ul><ul><li>Gives limited liability to members </li></ul><ul><li>Can hold assets </li></ul><ul><li>Can enter into contracts in its own name </li></ul>
  17. 17. Company Limited by Guarantee (3) <ul><li>Straightforward to set up </li></ul><ul><ul><li>Set of standard documents to accompany the main constitutional document </li></ul></ul><ul><li>Flexible </li></ul><ul><ul><li>Memorandum and Articles of Association can be &quot;tailor made&quot; </li></ul></ul><ul><ul><li>Process exists for changing constitution if needed </li></ul></ul><ul><li>Can be charitable or a CIC </li></ul>
  18. 18. Industrial and Provident Society <ul><li>Two main types: </li></ul><ul><ul><li>Co-operatives; and </li></ul></ul><ul><ul><li>“ Ben-Coms” </li></ul></ul><ul><li>Co-ops: for the benefit of those who join it as a member </li></ul><ul><li>Ben Coms: organisation set up to benefit people in a particular area; person can benefit from a “Bencom” even if he/she is not a member </li></ul><ul><li>Regulated by Financial Services Authority </li></ul>
  19. 19. Industrial and Provident Society <ul><li>IPSs can now have asset lock, similar to CIC asset lock </li></ul><ul><li>Must have “special reasons” to set up a Ben-Com rather than a company </li></ul><ul><li>Ben-Coms can be charitable </li></ul><ul><li>Generally higher set up costs than companies </li></ul><ul><li>NB community investment – some useful key features </li></ul>
  20. 20. Charitable Status <ul><li>In order to be charitable, an organisation must be “established for charitable purposes” </li></ul><ul><li>“ Charitable purposes” means purposes which are “exclusively charitable according to the law of England and Wales” </li></ul><ul><li>13 listed in the Act but a wide range in practice </li></ul><ul><li> Charities Act 2006 </li></ul>
  21. 21. Charitable Status <ul><li>Some social enterprises are charities </li></ul><ul><li>Some helpful charitable purposes: </li></ul><ul><ul><li>Urban or rural regeneration </li></ul></ul><ul><ul><li>Community capacity building </li></ul></ul><ul><ul><li>Relieving unemployment </li></ul></ul><ul><li>Health warning – Charity Commission guidance! </li></ul><ul><li>But what about activities? </li></ul>
  22. 22. Charitable Status <ul><li>Tax treatment different to normal companies </li></ul><ul><ul><li>Exempt from most forms of Corporation Tax </li></ul></ul><ul><ul><li>Other tax advantages </li></ul></ul><ul><li>Access to sources of funding </li></ul><ul><li>Restrictions on trading </li></ul><ul><li>Regulation by Charity Commission </li></ul><ul><li>“ Burning the bridge” </li></ul>
  23. 23. Community Interest Companies <ul><li>New legal form for social enterprise </li></ul><ul><li>CIC registration: CIC regulator </li></ul><ul><li>“ Community benefit” </li></ul><ul><li>Annual Community Interest Report </li></ul><ul><li>Standard/required provisions in M&A </li></ul><ul><li>Asset lock </li></ul><ul><li>No tax breaks </li></ul>
  24. 24. Community Interest Company <ul><li>Community Interest Test </li></ul><ul><li>( s35(2) Companies Audit, Investigations and Community Enterprise) Act 2004 </li></ul><ul><li>“ 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” </li></ul>
  25. 25. Community Investment <ul><li>Community share issues (equity) </li></ul><ul><li>Community bonds (debt based) </li></ul><ul><li>Companies limited by guarantee cannot issue shares </li></ul><ul><li>CICs ltd by shares and Community Benefit Societies can </li></ul>
  26. 26. Community Investment <ul><li>Some important features of Community Benefit Societies: </li></ul><ul><ul><li>One member one vote (however many shares) </li></ul></ul><ul><ul><li>Withdrawable share capital (not just transferable) </li></ul></ul><ul><ul><li>£20,000 investment limit for individual members </li></ul></ul><ul><ul><li>And therefore, exemption from some FSA regulations in relation to share issues </li></ul></ul>
  27. 27. Unincorporated Associations <ul><li>A group of people – a defined purpose </li></ul><ul><li>Will have some rules, even if not written </li></ul><ul><li>Residents’ associations, sports and other clubs, trade unions, event committees … </li></ul><ul><li>Need not be of benefit to wider community </li></ul>
  28. 28. Unincorporated Associations <ul><li>Some of the implications: </li></ul><ul><li>The organisation has no separate legal identity </li></ul><ul><li>But: </li></ul><ul><ul><li>the members will still have duties and liabilities to each other </li></ul></ul><ul><ul><li>… and potentially to other people </li></ul></ul>
  29. 29. More complex structures Case study 1: You are working with a Development Trust who wish to work with a private sector training provider to set up a new training base on their “patch”. Both organisations would like a share of the profits if the new venture makes money. The community are anxious not to lose control of the venture.
  30. 30. More complex structures <ul><li>Case study 1: </li></ul><ul><li>Joint venture </li></ul><ul><li>Set up new CIC ltd by shares </li></ul><ul><ul><li>One share each </li></ul></ul><ul><ul><li>Profit sharing </li></ul></ul><ul><ul><li>Each appoint 2 Directors, M&A will provide decision making protection </li></ul></ul><ul><ul><li>Framework agreement “around” JVCo </li></ul></ul>
  31. 31. More complex structures Case study 2: You are working with a rural development trust who are interested in developing renewable energy. They are considering how to shield the main Trust from the risk of the venture, and are also wondering how to raise finance and whether to work with a private sector partner.
  32. 32. More complex structures <ul><li>Case study 2: </li></ul><ul><li>Rural development trust (CIC) </li></ul><ul><li>Setting up energy supply company as separate body </li></ul><ul><ul><li>Wholly owned by Trust / part owned with private sector partner? </li></ul></ul><ul><ul><li>IPS for community share issue? (control?) </li></ul></ul>
  33. 33. How do you make the choice? <ul><li>Assess what you want the vehicle to do </li></ul><ul><li>Do you want to give out profits to members or investors, or is it not for profit? </li></ul><ul><li>Is it likely to have only charitable aims? </li></ul><ul><li>Is it likely to carry out only charitable activities? </li></ul><ul><ul><li>Trading? </li></ul></ul><ul><li>Are the tax advantages going to be important? </li></ul>
  34. 34. How do you make the choice? <ul><li>How certain are you – do you need to retain flexibility? </li></ul><ul><li>How are you going to raise funds? </li></ul>
  35. 35. <ul><li>With me so far? </li></ul>
  36. 36. Structuring for Success Constitutions – what they’re for and what should be in them David Alcock 9 th December 2009
  37. 37. What is a constitution for? <ul><li>Organisations are not like people! </li></ul><ul><li>They need constitutions to: </li></ul><ul><ul><li>tell them how to do things </li></ul></ul><ul><ul><li>give them some certainty </li></ul></ul><ul><ul><li>protect the members </li></ul></ul>
  38. 38. What is a constitution for? <ul><li>Most constitutions have to meet external requirements </li></ul><ul><ul><li>charity constitutions </li></ul></ul><ul><ul><li>CIC constitutions </li></ul></ul><ul><ul><li>co-operatives and “ben-coms” </li></ul></ul>
  39. 39. The key elements of a constitution <ul><li>What is this group? </li></ul><ul><ul><li>Name </li></ul></ul><ul><ul><li>Aims and core purpose </li></ul></ul><ul><ul><li>Powers </li></ul></ul><ul><ul><li>Profit making or non profit making </li></ul></ul><ul><ul><li>Equal opportunities statement </li></ul></ul>
  40. 40. The key elements of a constitution <ul><li>Membership </li></ul><ul><ul><li>Who are they </li></ul></ul><ul><ul><li>How do they become members </li></ul></ul><ul><ul><li>Different groups? </li></ul></ul><ul><ul><li>How are they removed </li></ul></ul>
  41. 41. The key elements of a constitution <ul><li>Management </li></ul><ul><ul><li>Committee / Board </li></ul></ul><ul><ul><li>Who is on the Board, how do they get there </li></ul></ul><ul><ul><li>Any categories / criteria (eg residents, stakeholders) </li></ul></ul><ul><ul><li>How long are they on for, how do you get them off? </li></ul></ul><ul><ul><li>Officers? </li></ul></ul>
  42. 42. The key elements of a constitution <ul><li>Meetings </li></ul><ul><ul><li>Members / Board </li></ul></ul><ul><ul><li>How often? </li></ul></ul><ul><ul><li>Quorum </li></ul></ul><ul><ul><li>Voting </li></ul></ul><ul><ul><li>Minutes </li></ul></ul>
  43. 43. The key elements of a constitution <ul><li>Other key elements </li></ul><ul><ul><li>Delegations – committees, working groups </li></ul></ul><ul><ul><li>Changing the constitution </li></ul></ul><ul><ul><li>Dissolution </li></ul></ul><ul><ul><li>Conduct of Board members </li></ul></ul>
  44. 44. Other useful governance tools <ul><li>Complaints procedure </li></ul><ul><li>Code of conduct </li></ul><ul><li>Terms of reference for sub groups </li></ul><ul><li>Financial rules </li></ul>
  45. 45. Trading Companies David Alcock 9 th December 2009
  46. 46. Trading issues <ul><li>What do we mean by a trading company? </li></ul><ul><li>When might you want to set one up? </li></ul><ul><li>What legal form do trading companies take? </li></ul><ul><li>What are the issues in forming a group structure? </li></ul>
  47. 47. What is a trading subsidiary? <ul><li>A company (or other corporate entity) </li></ul><ul><li>Which is: </li></ul><ul><ul><li>Separately registered </li></ul></ul><ul><ul><li>But wholly or mainly owned by another company (the “parent”) </li></ul></ul><ul><ul><li>And forms a group structure with that parent </li></ul></ul><ul><li>Distinction from joint ventures </li></ul>
  48. 48. When might you want one? <ul><li>If you are a charity and: </li></ul><ul><ul><li>You are restricted by the rules on charities and trading; or </li></ul></ul><ul><ul><li>You want to do non charitable things </li></ul></ul><ul><li>If you want to: </li></ul><ul><ul><li>Set up something new; or </li></ul></ul><ul><ul><li>Move into a risky business area; and </li></ul></ul><ul><ul><li>You want to contain the risk </li></ul></ul>
  49. 49. When might you want one? <ul><li>Charities and trading </li></ul><ul><li>Trading is: </li></ul><ul><ul><li>The sale of goods or services </li></ul></ul><ul><ul><li>But not: </li></ul></ul><ul><ul><ul><li>The sale of donated goods, given to the charity for selling on </li></ul></ul></ul><ul><ul><ul><li>The sale of investments </li></ul></ul></ul><ul><ul><ul><li>The sale of assets used by the charity for its charitable purposes </li></ul></ul></ul><ul><ul><ul><li>The letting of land or buildings without services </li></ul></ul></ul>
  50. 50. When might you want one? <ul><li>Charities and trading </li></ul><ul><li>Charities CAN engage in some trading: </li></ul><ul><ul><li>Where it contributes directly to the meeting of their objects (“primary purpose” trading); </li></ul></ul><ul><ul><li>Where it contributes indirectly (“ancillary” trading); </li></ul></ul><ul><ul><li>A limited amount of trading purely to raise funds, provided there is “no significant risk” to the charity – NB tax issues </li></ul></ul>
  51. 51. What legal form do trading companies take? <ul><li>Often (but not always) a company limited by shares, with the parent company owning all or a majority of the shares </li></ul><ul><li>NB charities can now jointly own a trading company and both benefit from the gift aid provisions </li></ul><ul><li>Can be a community interest company (CIC) </li></ul>
  52. 52. What are the issues in managing two companies? <ul><li>Have to run the subsidiary as a genuinely separate company </li></ul><ul><ul><li>Two boards of directors – some distinct membership </li></ul></ul><ul><ul><li>More meetings </li></ul></ul><ul><ul><li>Administration, consolidated accounts </li></ul></ul><ul><li>Funding issues </li></ul><ul><ul><li>Other investors </li></ul></ul><ul><ul><li>Funding from the parent </li></ul></ul><ul><li>The relationship can get complicated! </li></ul>
  53. 53. Structuring for Success Thanks for listening! David Alcock 0121 212 7451 [email_address] 9 th December 2009