legal structures and governance rachel gwynne and emma fitzgerald 2nd february 2010
TRANSCRIPT
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Legal Structures and Governance
Rachel Gwynne and Emma Fitzgerald
2nd February 2010
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Introductions
Rachel Gwynne – Associate
Emma Fitzgerald – Trainee Solicitor
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Overview of today
Thinking about various legal structures
Spotlight on the CIC model
Considering governance and effective Boards
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Legal Structures and Governance
Part 1
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Legal structures
Does it matter?
Yes it does, because it affects: what you can do liability how the group can hold money or
assets who will fund you and how
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Choosing the right vehicle
Where do you want to go?What are your options?How should you decide?
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Where do you want to go? What do you want to achieve through the
your organisation:
tradingenterprise developmentholding assetscommunity engagementa long term presence
Consider your aims in principle before you choose a structure
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Where do you want to go? Key issues – do you want to:
employ staff?enter into contracts?own property?provide or procure services?
... independently, without risking personal liability to members
If so, then you will probably need a separate vehicle
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What are the options?Profit distributing structures
Companies limited by sharesIncluding PLCs
Limited Liability Partnerships
Industrial and Provident SocietiesCo-operatives
Community interest company ltd by shares
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What are the options?Non profit distributing structures
Companies limited by guarantee
Industrial and Provident SocietiesCommunity benefit Societies
Community interest company limited by guarantee
Charitable status?
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What are the options?
If an organisation isn’t any of those, then in law its probably an “unincorporated association” - an association of two or more people “for common purposes” (but not business) with shared duties and obligations, in an organisation with rules.
- Or a “sole trader” or “partnership” (if its about business).
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So, how do you tell? Look at the constitution (if there is one)
Search the Companies House website
Search the Charity Commission website
Search the register of industrial and provident societies http://mutuals.fsa.gov.uk/
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So, how do you tell?
If it isn’t a company, an IPS or a charity …
then its probably an unincorporated association (if its not about business)
or a sole trader or a partnership (if it is)
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Don’t worry about labels
“Social Enterprise” “Community Development Trust” “Community Enterprise”
… don’t worry too much!
Basic options the same
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Company Limited by Guarantee
Registered by the Registrar of Companies
Separate legal identityAny property or contract is entered into in the company (not the members') name
Accounts, returns and information filed with Companies House
Can be charitable or a Community Interest Company
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Company Limited by Guarantee
Common vehicle for non-profit making organisations
No shares; Members give £1 “guarantee”
Gives limited liability to members
Can hold assets
Can enter into contracts in its own name
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Company Limited by Guarantee
Straightforward to set upSet of standard documents to accompany
the main constitutional document
FlexibleMemorandum and Articles of Association
can be "tailor made"Process exists for changing constitution if
needed
Can be charitable or a CIC
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Industrial and Provident Society
Two main types:Co-operatives; andBenefit of the Community (“Ben-Com”)
Co-ops: for the benefit of those who join it as a member
Ben-Coms: organisations set up to benefit people in a particular area; person can benefit from a Ben-com even if he/she is not a member
Regulated by Financial Services Authority
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Industrial and Provident Society
IPSs can now have asset lock, similar to CIC asset lock
Must have “special reasons” to set up a Ben-Com rather than a company
Ben-Coms can be charitable
Generally higher set up costs than companies
NB community investment – some useful key features
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Charitable Status
In order to be charitable, an organisation must be “established for charitable purposes”
“Charitable purposes” means purposes which are “exclusively charitable according to the law of England and Wales”
13 listed in the Charities Act 2006 but a wide range in practice
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Charitable Status Some social enterprises are charities
Some helpful charitable purposes: Urban or rural regeneration Community capacity building Relieving unemployment
Health warning – Charity Commission guidance!
But what about activities?
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Charitable Status
Tax treatment different to normal companiesExempt from most forms of Corporation
TaxOther tax advantages
Access to sources of funding
Restrictions on trading
Regulated by Charity Commission
“Burning the bridge”
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Community Investment
Community share issues (equity)
Community bonds (debt based)
Companies limited by guarantee cannot issue shares
CICs ltd by shares and Community Benefit Societies can
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Community Investment
Some important features of Community Benefit Societies:
One member one vote (however many shares)Withdrawable share capital (not just
transferable)£20,000 investment limit for individual membersAnd therefore, exemption from some FSA
regulations in relation to share issues
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Unincorporated Associations
A group of people with a defined purpose
Will have some rules, even if not written
Residents’ associations, sports and other clubs, trade unions, event committees …
Need not be of benefit to wider community
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Unincorporated Associations
Some of the implications:
The organisation has no separate legal identity
But:
the members will still have duties and liabilities to each other
… and potentially to other people
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Trading issues
What do we mean by a trading company?
When might you want to set one up?
What legal form do trading companies take?
What are the issues in forming a group structure?
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What is a trading subsidiary?
A company (or other corporate entity)
Which is:
Separately registeredBut wholly or mainly owned by another
company (the “parent”)And forms a group structure with that
parent
Distinction from joint ventures
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When might you want one?
If you are a charity and:You are restricted by the rules on charities
and trading; orYou want to do non charitable things
If you want to:Set up something new; orMove into a risky business area; andYou want to contain the risk
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When might you want one?
Charities and trading
Trading is:The sale of goods or services
But not:The sale of donated goods, given to the charity
for selling onThe sale of investmentsThe sale of assets used by the charity for its
charitable purposesThe letting of land or buildings without services
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When might you want one?
Charities CAN engage in some trading:
Where it contributes directly to the meeting of their objects (“primary purpose” trading);
Where it contributes indirectly (“ancillary” trading);
A limited amount of trading purely to raise funds, provided there is “no significant risk” to the charity – NB tax issues
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What legal form do trading companies take?
Often (but not always) a company limited by shares, with the parent company owning all or a majority of the shares
Can be a community interest company (CIC)
NB charities can now jointly own a trading company and both benefit from the gift aid provisions
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What are the issues in managing two companies?
Have to run the subsidiary as a genuinely separate companyTwo boards of directors – some distinct
membershipMore meetingsAdministration, consolidated accounts
Funding issuesOther investorsFunding from the parent
The relationship can get complicated!
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Legal Structures and Governance
Part 2
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Community Interest Companies
Fairly new legal form for social enterprise (since 2005)
CIC registration: CIC regulator “Community benefit” Annual Community Interest Report Standard/required provisions in M&A Asset lock No tax breaks
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Community Interest Company
“Community Benefit”
Community Interest Test (s35(2) Companies Audit, Investigations and Community Enterprise) Act 2004
“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”
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Community Interest Company
The Asset Lock
CIC can dispose of any asset at market value CIC can dispose at less than market value to
another ‘asset-locked’ body - mainly charity or another CIC
Some distribution allowed in share CICs (see below)
otherwise assets and income must be used for objects of CIC: no asset-stripping.
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Community Interest Company
The dividend and interest caps
Recent changes announced by CIC Regulator following review (in force 6 April 2010): overall cap – no more than 35% of distributable profits
can be passed to shareholders (remains the same);
dividend cap on individual shares – 20% of the paid up value of a share (was BoE base rate plus 5%); and
Interest on performance-related loans – cap also amended to 10% of average amount of CIC’s debt (was 4% over BoE base rate)
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How do you make the choice?
Assess what you want the vehicle to do Do you want to give out profits to members or
investors, or is it not for profit? Is it likely to have only charitable aims? Is it likely to carry out only charitable
activities?Trading?
Are the tax advantages going to be important?
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How do you make the choice?
How certain are you – do you need to retain flexibility?
How are you going to raise funds?
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With us so far?
Time for a break!
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Legal Structures and Governance
Part 3
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Effective Governance
• Two pronged approach to effective governance:
Legal / procedural documents and policies
Training / soft skills
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Documented Governance is …
a framework for action
a means to an end
protection
a way of working together
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What is a constitution for?
Organisations are not like people! They need constitutions to:
tell them how to do things give them some certainty protect the members
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What is a constitution for?
Most constitutions have to meet external requirements
Company constitutions Charity constitutions CIC constitutions Co-operatives and “ben-coms”
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The key elements of a constitution
What is this organisation?
Name
Aims and core purpose
Powers
Profit making or non profit making
Equal opportunities statement
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The key elements of a constitution
Membership
Who are they
How do they become members
Different groups?
How are they removed
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The key elements of a constitution
Management
Committee / Board
Who is on the Board, how do they get there
Any categories / criteria (eg residents, stakeholders)
How long are they on for, how do you get them off?
Officers?
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The key elements of a constitution
Meetings
Members / Board
How often?
Quorum
Voting
Minutes
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The key elements of a constitution
Other key elements
Delegations – committees, working groups
Changing the constitution
Dissolution
Conduct of Board members
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Other useful governance tools
Complaints procedure
Code of conduct
Terms of reference for sub groups
Scheme of delegations
Financial rules
See NCVO’s Code of Good Governance - free from www.ncvo-vol.org.uk)
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Training / Soft Skills
• Effective listening and communication
• Effective decision making
• Collective responsibility
• Collective problem solving
• Chairing skills
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Any Questions
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Legal Structures and Governance
Thanks for listening!
Rachel Gwynne and Emma Fitzgerald0121 214 3532
2nd February 2010