A decision around membership relates to who will have ultimate decision making powers within your organisation. The majority of third sector organisations in Scotland are membership organisations, with a body of members who have the power to shape the constitution, elect a Board (who control the activities and finances of the organisation) and dissolve a charity where necessary.
If you do decide to go for a membership organisation, the following questions are worth considering:
- Who will be invited to be members? People in a certain geography? People of a certain age? People with a certain interest? Etc.
- Will your members have to pay a fee to join?
- What will the benefits of membership be?
- How will new members join and how long will membership last?
- How and why will you cancel membership?
- Will employees be eligible for membership? If so, will any restrictions be placed on them?
- Will membership be open to individuals, organisations or both?
- Will it be possible to refuse membership?
- If a member stops being eligible, will their membership cease immediately?
Potential legal structures if you opt for membership:
- a voluntary association
- a Company Limited by Guarantee
- a Company Limited by Shares
- a BenCom
- a Co-operative
- a Community Interest Company
- Scottish Charitable Incorporated Organisation (SCIO)
Legal structures if you don’t opt for membership:
- a single tier SCIO
- a trust
Is charitable status for you?
A charity is an organisation set up solely for charitable purposes and to provide a public benefit. It also must not:
- not allow its property to be used for non-charitable purposes
- not allow Ministers to direct or otherwise control its activities
- not be a political party, and not have as its purposes the advancement of a political party
Not all voluntary organisations are charities. There are distinct advantages and disadvantages relating to charity status that should be considered.
| Advantages | Disadvantages |
| Tax relief on surpluses and donations | Restrictions on spending |
| Access to funding only available to charities | Cannot engage in party political activities |
| Rates relief for premises | Must adhere to specific legislation |
| Special VAT concessions | Trustees have specific duties and responsibilities under legislation |
All charities must submit an annual return and accounts to OSCR every year and seek their permission to make certain changes.
Is charity status right for you?
| Yes | No |
| Trust | Trust |
| Community Interest Company |
Is charitable status for you?
A charity is an organisation set up solely for charitable purposes and to provide a public benefit. It also must:
- not allow its property to be used for non-charitable purposes
- not allow Ministers to direct or otherwise control its activities
- not be a political party, and not have as its purposes the advancement of a political party
Not all voluntary organisations are charities. There are distinct advantages and disadvantages relating to charity status that should be considered.
| Advantages | Disadvantages |
|---|---|
| Tax relief on surpluses and donations | Restrictions on spending |
| Access to funding only available to charities | Cannot engage in party political activities |
| Rates relief for premises | Must adhere to specific legislation |
| Special VAT concessions | Trustees have specific duties and responsibilities under legislation |
All charities must submit an annual return and accounts to OSCR every year and seek their permission to make certain changes.
Is charity status right for you?
| Yes | No |
|---|---|
| Scottish Charitable Incorporated Organisation (SCIO) | Unincorporated association |
| Voluntary or Unincorporated Association | Company Limited by Guarantee |
| Company Limited by Guarantee | Community Interest Company |
| BenCom | Co-operative Society |
| BenCom | |
| Company Limited by Shares |
Consider the risks
Alongside deciding on a legal structure, you should also consider whether your organisation should become incorporated or not.
Unincorporated:
A group of individuals, each with personal liability. For example, if they wish to purchase property, an individual must do this on this organisation’s behalf.
Incorporated:
The organisation has a legal identity of its own, reducing personal liability of individuals. For example, the organisation can purchase property in its own name.
However, personal liability may still occur if trustees are:
- reckless
- negligent
- act illegally
- act outwith their powers in the management and control of the organisation
Thinking through the types of activities you will be involved in should help you to make this decision. Organisations engaging in high risk activities such as employing staff and purchasing property will need to consider incorporation.
| Benefits of incorporation | Benefits of remaining unincorporated |
| 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. |
Light touch regulation It is sometimes argued that being unincorporated allows a more relaxed operation. Whilst all incorporated organisations are regulated and have to register, complete annual returns and file accounts by law, an unincorporated organisation is only required to comply with the normal statutory obligations of any business with regard to its management (for example, VAT registration, PAYE, health and safety, insurance). However, many organisations feel that the additional administration of incorporation is very small in comparison to the other operational demands that they must meet regardless of the legal form they adopt.Charities (which can be incorporated or unincorporated) are subject to specific charity law regulation in addition to the general law. |
| 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. |
Tax advantages Reduced rate national insurance (NI) contributions are applicable to owners who are treated as self-employed. Sole trader/partnership losses may be set against tax paid on other income in the same year or in the preceding year, or can be carried back up to three years in the early years of a trade. For more information on tax go to www.hmrc.gov.uk |
| 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. |
|
| Developing a sense of ownership Incorporation provides an established formal structure for some types of stakeholder involvement. |
|
| 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. |
|
| Recognition by financial institutions and investors Many banks and financial institutions will insist on incorporation before providing loan finance. |
|
| Availability of equity finance Equity finance is only available to certain types of incorporated organisations. If you want to raise equity investment, your organisation will have to incorporate. |
|
| www.getlegal.org.uk, 10/08/15 | |
Co-operative Society
Regularly referred to as a ‘bonafide co-operative’, an IPS Co-operative is a legal form established for members benefit as opposed to public benefit. They are characterised by the ‘one member, one vote’ principle.
IPS Co-operatives are controlled by a management committee with a set of rules which govern their decision making. They are regulated by the Financial Conduct Authority and as an incorporated organisation have limited liability. Loans and equity finance are available to them. However, as they are rarely granted charitable status, grants are more difficult to secure.
Get help and advice from Co-operatives UK in developing your rules.
BenCom
Regularly referred to as a ‘bencom’, an IPS Community Benefit Society is a legal form established for the benefit of a defined community. As with the IPS Co-operative, they are characterised by the ‘one member, one vote’ principle. In addition to adopting this co-operative principle, the constitution will need to demonstrate that the organisation is being run for the benefit of the community as opposed to the members.
IPS Community Benefit Societies are controlled by a management committee with a set of rules which govern their decision making. They are regulated by the Financial Conduct Authority and as an incorporated organisation have limited liability. Loans and equity finance are available to them although rarely grants. Charitable status is an option and they can therefore benefit from charitable tax breaks.
Get help and advice from Co-operatives UK in developing your rules.
Company Limited by Guarantee
A Company Limited by Guarantee is a legal form that has no shareholders or share capital. Rather the members provide a guarantee to cover the organisation’s liabilities (normally limited to £1), they then become owners of the organisation. Membership is therefore an important feature of this legal form and as such the types of membership and the benefits members will receive must be recorded clearly.
A Company Limited by Guarantee is controlled by a Board of Directors or Board of Trustees (if it has charitable status). The organisation is governed by a Memorandum and Articles of Association and are regulated by Companies House. If the organisation is granted charitable status then they are also regulated by the Office of the Scottish Charity Regulator (OSCR). As an incorporated legal form, Companies Limited by Guarantee have limited liability. Grants and loans are available, however equity finance is not.
Write your Memorandum and Articles of Association
A company limited by guarantee can be used as a legal structure both for charities and for other not for profit organisations. Find out how to write a constitution for a company limited by guarantee.
Community Interest Company
A Community Interest Company (CIC) is a legal form which allows for non-charitable social enterprises to put a lock on their assets. In contrast to charities, they enable the social entrepreneur to both control the organisation and take a paid salary. CICs can be limited by shares or guarantee and as such have limited liability. 65% of profits must be reinvested leaving a maximum of 35% of profits for shareholders.
CICs are controlled by Boards of Directors, governed by a Memorandum and Articles of Association. They are regulated by Companies House and the CIC Regulator and must demonstrate that they are pursing the community interest and must put a statement to this effect in their Memorandum and Articles of Association. CICs can access certain grants and are able to take out loans and equity finance like other companies.
Write your Memorandum and Articles of Association
The CIC regulator has model guidance.
Scottish Charitable Incorporated Organisation
A Scottish Charitable Incorporated Organisation (SCIO) is a legal form that provides the limited liability of an incorporated legal form but without the need to report to two regulators. Unlike companies with charitable status, SCIOs report solely to the Office of the Scottish Charity Regulator (OSCR).
SCIOs are controlled by a Board of Trustees whose decision making is governed by a constitution. They are able to apply for grants, whilst also being in a position to access loans and equity finance.
A Scottish Charitable Incorporated Organisation is a legal structure developed especially for charities in Scotland. Find out how to write a constitution for a SCIO.
What is an unincorporated association?
An unincorporated association is made up of individuals with a common purpose. They normally have a constitution which sets out the details of the organisation, including who can be members, how and when meetings should be help and the aims of the organisation. They generally have a management committee made up of elected individuals from the membership.
Unincorporated associations do not have limited liability and as such the individuals are liable for any debt the association incurs.
While a voluntary or unincorporated association is a simple legal form, it still requires a constitution. Find help and resources from SCVO to write a constitution for a voluntary association.
Consider the risks
Alongside deciding on a legal structure, you should also consider whether your organisation should become incorporated or not.
Unincorporated:
A group of individuals, each with personal liability. For example, if they wish to purchase property, an individual must do this on this organisation’s behalf.
Incorporated:
The organisation has a legal identity of its own, reducing personal liability of individuals. For example, the organisation can purchase property in its own name.
However, personal liability may still occur if trustees are:
- reckless
- negligent
- act illegally
- act outwith their powers in the management and control of the organisation
Thinking through the types of activities you will be involved in should help you to make this decision. Organisations engaging in high risk activities such as employing staff and purchasing property will need to consider incorporation.
| Benefits of incorporation | Benefits of remaining unincorporated |
| 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. |
Light touch regulation It is sometimes argued that being unincorporated allows a more relaxed operation. Whilst all incorporated organisations are regulated and have to register, complete annual returns and file accounts by law, an unincorporated organisation is only required to comply with the normal statutory obligations of any business with regard to its management (for example, VAT registration, PAYE, health and safety, insurance). However, many organisations feel that the additional administration of incorporation is very small in comparison to the other operational demands that they must meet regardless of the legal form they adopt.Charities (which can be incorporated or unincorporated) are subject to specific charity law regulation in addition to the general law. |
| 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. |
Tax advantages Reduced rate national insurance (NI) contributions are applicable to owners who are treated as self-employed. Sole trader/partnership losses may be set against tax paid on other income in the same year or in the preceding year, or can be carried back up to three years in the early years of a trade. For more information on tax go to www.hmrc.gov.uk |
| 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. |
|
| Developing a sense of ownership Incorporation provides an established formal structure for some types of stakeholder involvement. |
|
| 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. |
|
| Recognition by financial institutions and investors Many banks and financial institutions will insist on incorporation before providing loan finance. |
|
| Availability of equity finance Equity finance is only available to certain types of incorporated organisations. If you want to raise equity investment, your organisation will have to incorporate. |
|
| www.getlegal.org.uk, 10/08/15 | |
Co-operative Society
Regularly referred to as a ‘bonafide co-operative’, an IPS Co-operative is a legal form established for members benefit as opposed to public benefit. They are characterised by the ‘one member, one
vote’ principle.
IPS Co-operatives are controlled by a management committee with a set of rules which govern their decision making. They are regulated by the Financial Conduct Authority and as an incorporated organisation have limited liability. Loans and equity finance are available to them. However, as they are rarely granted charitable status, grants are more difficult to secure.
Get advice a support from Co-operatives UK in developing your rules.
BenCom
Regularly referred to as a ‘bencom’, an IPS Community Benefit Society is a legal form established for the benefit of a defined community. As with the IPS Co-operative, they are characterised by the ‘one member, one vote’ principle. In addition to adopting this co-operative principle, the constitution will need to demonstrate that the organisation is being run for the benefit of the community as opposed to its members.
IPS Community Benefit Society are controlled by a management committee with a set of rules which govern their decision making. They are regulated by the Financial Conduct Authority and as an incorporated organisation have limited liability. Loans and equity finance are available to them although rarely grants. Charitable status is an option and they can therefore benefit from charitable tax breaks.
Get advice and support from Co-operatives UK in developing your rules.
Company Limited by Shares
A Company Limited by Shares is a legal form that divides its capital in fixed amounts between its shareholders. This model has the potential to have a positive impact on the organisation’s balance sheet, thus potentially making it easier to secure finance. It can also be used to promote a sense of ownership, for example when staff or community members are shareholders.
Companies Limited by Shares are controlled by a Board of Directors whose decision making is governed by a Memorandum and Articles of Association. They are regulated by Companies House and, as they are an incorporated legal form, they have limited liability. It is unlikely that a Company Limited by Shares would be granted charitable status. However, loans and equity finance are possibilities.
Write your Memorandum and Articles of Association
Find advice and support on Companies Limited by Shares at Gov.UK
Company Limited by Guarantee
A Company Limited by Guarantee is a legal form that has no shareholders or share capital. Rather the members provide a guarantee to cover the organisation’s liabilities (normally limited to £1), they then become owners of the organisation. Membership is therefore an important feature of this legal form and as such the types of membership and the benefits members will receive must be recorded clearly.
A Company Limited by Guarantee is controlled by a Board of Directors or Board of Trustees (if it has charitable status). The organisation is governed by a Memorandum and Articles of Association and are regulated by Companies House. If the organisation is granted charitable status then they are also regulated by the Office of the Scottish Charity Regulator (OSCR). As an incorporated legal form, Companies Limited by Guarantee have limited liability. Grants and loans are available, however equity finance is not.
Write your Memorandum and Articles of Association
A company limited by guarantee can be used as a legal structure both for charities and for other not for profit organisations. Find out how to write a Memorandum and Articles of Association for a company limited by guarantee.
Community Interest Company
A Community Interest Company (CIC) is a legal form which allows for non-charitable social enterprises to put a lock on their assets. In contrast to charities, they enable the social entrepreneur to both control the organisation and take a paid salary. CICs can be limited by shares or guarantee and as such have limited liability. 65% of their profits must be reinvested
leaving a maximum of 35% of profits for shareholders.
CICs are controlled by Boards of Directors, governed by a Memorandum and Articles of Association. They are regulated by Companies House and the CIC Regulator and must demonstrate that they are pursing the community interest and must have a statement to this effect in their Memorandum and Articles of Association. CICs can access certain grants and are able to take out loans and equity finance like other companies.
Write your Memorandum and Articles of Association
Get help and support from Co-opertives UK in developing your Memorandum and Articles of Association.
What is an unincorporated association?
An unincorporated association is made up of individuals with a common purpose. They normally have a constitution which sets out the details of the organisation, including who can be members, how and when meetings should be help and the aims of the organisation. They generally have a management committee made up of elected individuals from the membership.
Unincorporated associations do not have limited liability and as such the individuals are liable for any debt the association incurs.
While a voluntary or unincorporated association is a simple legal form, it still requires a constitution. Find help and resources from SCVO to write a constitution for a voluntary association.