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Voluntary Sector Organisational Structures

Any voluntary organisation must consider which legal form/framework to adopt. This helps to determine the organisation’s place in the regulatory framework and, importantly, the liability of the people involved in running the organisation. It is vital that all the pros and cons of adopting a particular legal form/structure are considered. Advantages of one form may be limited liability for voluntary committee members; disadvantages may be the costs involved in registration or annual reporting requirements.

What is Charitable Status?

Charitable status is a particular type of legal status, which has a number of potential benefits, but also some limitations on an organisation’s activities. The Inland Revenue in Scotland is the body, which has the power to grant such status. The pros and cons of charitable status should be considered carefully before applying.

The principal benefits of charitable status are tax-related. Special advantageous relief’s and schemes concerning Income Tax, Corporation Tax, Council Tax/Rates and others are available to recognised charities. Charities do pay VAT although there are exemptions available for various activities.

In addition, charitable status is beneficial to fundraising. Many grant-giving trusts and foundations can only give funding to recognised charities. “Charity” is a very emotive word and can be very persuasive in encouraging the general public to donate in a variety of ways.

By becoming a charity, an organisation places itself within a particular legal institutional framework. Each nation within the UK has different charity law. In Scotland, charities are principally governed by the Law Reform (Miscellaneous Provisions) (Scotland) Act 1990.

Charitable status can also place restrictions on an organisation’s ‘political’ campaigning activities.

Criteria for becoming a Charity

In Scotland charitable status is determined by the Inland Revenue (IR) and is given to bodies, which the IR accepts as having objects that are exclusively charitable for tax purposes. A charity must have one or more of the following purposes:

• The relief of poverty
• The advancement of education
• The advancement of religion
• Other purposes beneficial to the community (including the provision of recreational or leisure facilities in the interest of social welfare).
• Relief of poverty

The Charity Commission uses a broad definition of poverty that includes people who are sick, have a disability or are mentally ill.

Relief of poverty can be provided directly, for example through gifts of money, or directly by helping people become more self-sufficient, for example through the provision of welfare advice. Unlike the other charitable purposes described below, poverty charities can work with a specific group of people (as opposed to being of benefit to the general public).

Advancement of education

There is no precise definition of education. The category would include:

• Promotion of commercial education
• Promotion of aesthetic education, for example through concerts or drama
• Research activities for public benefit
• Education about political principles in the academic sense (the Charity Commission would not accept for registration a group promoting a particular political view)
• The advancement of education must be for general public benefit.

Advancement of religion

This is not confined to the Christian faith. In order to qualify under this head a group must be able to demonstrate that its activities will benefit the general public.

Other purposes beneficial to the community

As long as a group can demonstrate that its activities are beneficial to the community (or a substantial part of it) there is scope for extending the traditional charitable frontiers. The following activities could fall into this category:

• Promotion of racial harmony
• Relieving unemployment
• Protection of lives or poverty of the community
• Rehabilitation of ex-offenders
• Promotion of industry, commerce or art
• Promotion of moral welfare
• Provision of public recreation and leisure facilities
• Conservation of the national heritage

A self-help organisation that exists exclusively for its members would not be eligible, as it does not operate for the general public benefit. However, if the objects clause in its constitution was carefully worded to allow for an unrestricted membership, it might be able to obtain charitable status.

These (and particularly the last one) are not as “catch-all” as they sound. They are interpreted subject to a long tradition of case law. In all cases the organisation must be for public benefit and clearly non-profit distributing. They are also known as the ‘four heads’ of a charity. A charity can be either incorporated (a company) or unincorporated.

Any organisation seeking charitable status must submit a copy of its constitution to the Financial Intermediaries and Claims Office (FICO) of the Inland Revenue. The approval of this office must be secured before the organisation can describe itself as a Scottish charity. The organisation can also send a draft constitution for feedback before they formally adopt it. Once provisional recognition is given, the organisation can go ahead and apply for definitive recognition.

Recognition of charitable status is given in a formal letter from the Inland Revenue. The letter will contain a number starting with the letters ‘SC’. This is the organisation’s Scottish Charity number, which should be used on stationary and in dealings with the public.

What is an Unincorporated Association?

The unincorporated association is the most common form of organisation within the voluntary sector in Scotland. An unincorporated association is a contractual relationship between the individual members of the organisation, all of whom have agreed or “contracted” to come together for a particular charitable purpose.

Unlike an incorporated body the association has no existence or personality separate from its individual members. There should be at least a written record or minute of agreement, which is adopted by an association as its constitution. This is necessary in order to become a recognised charity. A more detailed constitution may be advisable.

Over time the members of an association may wish to alter its purposes or the arrangements for the conducting its affairs. Unless there are any express rules governing the changing of purposes or rules it is presumed that changes can only be made with the consent of all the members of the association. Any such changes will normally be made at an Annual General Meeting (AGM) or an extraordinary General Meeting (EGM) of the members of the association.

Because an unincorporated association has no personality separate from its members the property and assets of the association cannot ‘belong’ to the association. Where the association has been formed purely for the benefit of its members, the assets will normally belong to the members in equal shares. On the other hand, if the association exists to benefit others, the property will normally be deemed to be held in trust for the purposes of the association.

Members of the voluntary management committee and the wider membership of an unincorporated association may be personally liable for any legal actions or debts facing the organisation.

What does it mean to become a Company?

In theory companies can be incorporated with either unlimited or limited liability, but a charitable company would normally opt for limited liability.

The limited company can take the form of a company limited by guarantee. A company limited by guarantee has members who do not make any payments to the company but simply guarantee to pay its debts. Under this arrangement the maximum extent of the members’ liability is limited to an agreed amount, usually £1 per member.

Charities with substantial financial commitments such as salaries for employees and lease or rental payments are likely to benefit from limited liability status.

A limited liability company is established through registration with the Registrar of Companies at Companies House. As part of the incorporation procedure two documents must be lodged with the Registrar of Companies, the memorandum of association and the articles of association, which is the company form of organisational constitution. There is an initial incorporation fee payable to the Registrar and also an annual cost in being a company. It is advisable when drafting memoranda and articles of association to consult your legal or professional advisor.

The memorandum of association specifies, often in great detail, what the company may do and what its objects are. It is important to ensure that these are compatible with at least one of the heads of charities. The articles of association are essentially the internal regulations of the company and regulate such matters as the convening and conduct of meetings and appointment and removal of directors.

When a new charitable organisation opts for incorporation the procedure is as outlined above. When an existing charitable organisation decides to change its status and become a company the procedure is different. A new body will be formed and then the entire assets and undertakings of the existing charitable body are transferred to the new company. This transaction must be carefully handled and any organisation contemplating changing status should obtain appropriate professional advice.

The provisions of the Companies Acts are applicable throughout the UK. There are implications for the way accounts are presented and an Annual Return to Companies House must be made.

What is a Co-operative?

There is no all-embracing legal definition of what constitutes a co-operative, and it is probably easier to recognise a co-operative than to define one. This being the case it is largely a matter of choice for each organisation as to which legal form it chooses to adopt. Thus a local community action co-operative may in fact be simply an unincorporated association with co-operative aims. There are, however, a number of characteristics, which are likely to be common to particular types of co-operatives, and there are also specific co-operatives, which are expressly recognised by statute.

One such body is the Industrial and Provident Society (IPS). The Acts of Parliament that regulate IPS’s state that one of the types of organisation, which may be permitted to register, as an IPS is a “bona fide co-operative” or a “society for the benefit of the community”. The IPS co-operative format is relatively common amongst housing, consumer and worker co-operatives and credit unions. Common features include the following:

• Membership is open, voluntary and free from discrimination
• Co-operatives are democratically controlled by their members – one member one vote
• Returns on capital (if any) should be at a strictly controlled rate of interest
• Economic benefits belong to the members and should be distributed in a fair and equitable manner

If an organisation tries to register as an IPS the Registrar will actively look to see that the organisation’s proposed constitution embraces these co-operatives principles.

The community benefit society is often loosely referred to as a co-operative. Again it is relatively common amongst housing associations but it has gained a degree of popularity with other democratic, non-profit organisations. The key difference being that the society must be able to show that it will benefit persons other than its own members.

UK Companies Acts

All Scottish charities are subject to the provisions of the 1990 Act irrespective of the type of legal form/structure they have chosen. However, companies, which have charitable status, are also subject to the statutory regime, which applies to every incorporated company in the United Kingdom.

There are some differences between Scotland, England, Wales and Northern Ireland in the application of the statutes dealing with companies, but most of the legislation applies both sides of the border. The main Act is the Companies Act 1985 (“the 1985 Act”) as amended by the Companies Act 1989. The Insolvency Act 1986 that deals with insolvency situations may also have implications for charities.

In simple terms, the Act starts out by detailing how a company may be formed and then sets out provisions, which regulate most of the key activities, the company may undertake. 

The 1985 Act is lengthy and lays down a great number of obligations. These are reasonable for medium to large sized trading companies but are onerous for small ones. Attempts to deal with this situation have been made recently and the Companies Act 1989 introduced a series of measures to lessen the burden of regulation. These included allowing companies to dispense with such measures as the holding of an annual general meeting and the annual re-appointments of auditors. This trend in deregulation was followed in 1994 by further regulations, which now exempt very small companies from the need to conduct annual audit of their accounts and relax the overall requirements for certain other companies.

Increasingly, changes to UK Company Law have been influenced by efforts on the part of the European Commission to harmonise Company Law across Europe. This trend is likely to continue. 

Publications

• Voluntary but not Amateur – ISBN O – 901171 – 95 – 6 Published by The London Service Council
• The Essential Advice and Information Manual – ISBN1 – 870904 – 62 – Published by SCVO
• A Practical Guide to Company Law for Voluntary Organisations – ISBN1 – 873860 –13 – 7 Published by The Directory of Social Change

How East Dunbartonshire CVS can help?

• EDCVS have staff that can help your organisation to prepare a constitution, write an action plan and give advice on applying for charitable status.
• We have Grantfinder in the office. Contact us to make an appointment and you will receive help in using the database.
• We have a number of funding books that you may browse.
• We can give advice on capacity building i.e. strengthening your organisation to make you better placed to apply for funding e.g. procedures, administration and finance.
• We can suggest funders who are most likely to fund your type of organisation.
• We run seminars and training on various topics of interest to voluntary organisations.
• We may be able to help you find statistics to back up your funding application, or advice you where to obtain them.