Getting ready to trade: Organisational structure

This page provides information on how to check you have the right organisational structure, organisation type and legal form for developing trading and enterprise activities.

Overview

Organisational structures describe how organisations function: who is in control, the objects and powers of the organisation, and how different parts of an organisation relate to each other. Most organisations have a governing document that describes their structure. The contents of a governing document are heavily influenced by the legal form used by the organisation. Some voluntary and community organisations might also choose to become a specific organisational type to assist with their branding, support and recognition.

Choosing the most appropriate legal form for your organisation is important because it will determine the powers and objects of your organisation, how it is regulated and how it trades. It is also important to decide whether your organisation should apply for charitable status, and how this might further influence your choice of legal form.

This page looks at:
• Legal forms: the legal 'packaging' of an organisation
• Organisational types: these help communicate what your organisation does and how it is structured.
• Charitable status and legal forms.

For more detailed information see Governance and Organisational Structures (pdf 575 kb) published by the Governance Hub and Co-operativesUK.

Legal forms

There are eight main types of legal form used by voluntary and community organisations:
• Association
• Trust
• Partnership
• Company 
• Industrial and provident society (IPS) 
• Limited liability partnership (LLP)
• Community interest company (CIC)
• Charitable incorporated organisation (not available until 2010).

Which legal form is right for your organisation?

When considering which legal form to use, it is important to apply the principle that 'form follows strategy'. In other words, don't get too hung up on legal forms: develop a clear-headed organisational plan first and then adopt the most appropriate legal form. Start with organisational strategy not the legal form.

You need to ensure that your organisational structure is fit for purpose; selecting the wrong one may limit what your organisation can achieve. Each legal form has distinct characteristics relating to corporate status, the governing document, the governing body, management structure, membership, assets and the use of profit.

One of the most crucial decisions is whether or not to incorporate. There are three unincorporated legal forms used by VCOs: associations, trusts and partnerships. Unincorporated organisations have no legal identity separate from their individual members. Members of the management committee are fully liable for all the actions of the organisation. Incorporated organisations (companies, IPSs, CICs and charitable incorporated organisations) have a separate legal identity and are entities in their own right, independent of their members. The liability of members of incorporated bodies is limited to the amount they have invested (companies limited by shares, and industrial and provident societies) or have guaranteed (companies limited by guarantee) to pay to creditors in the event of the organisation getting into financial difficulties.

An organisation developing trading activities that expose it to additional risks and liabilities, should seriously consider incorporation as a way of limiting those liabilities to an acceptable level.  

You can read more about organisational forms in the Governance Hub and Co-operativesUK guide to Governance and Organisational Structures (pdf 575kb). 

Trading Tool: Choosing the Right Legal Form

There are lots of key questions you need to ask when choosing a legal form for your trading venture, social enterprise or trading subsidiary.  Use this tool developed by NCVO together with legal experts Hempsons to work through the relevant issues such as trading purpose, ownership, governance and tax status. 

Trading: Chosing the Right Legal Form (PDF, 605kb)

Limited company

Companies can be limited by shares or limited by guarantee. A company limited by guarantee has subscribers who guarantee to pay a fixed amount, usually £1, in the event of the company being wound up with outstanding debts. The advantage of this form is that there are no shareholders, and subscribers do not usually have any rights to the profits or assets of the company. This makes it a particularly suitable form for charities and other non-profit-distributing organisations. However, it is not such a good form for trading subsidiaries, because it does not allow equity investment, and it requires careful drafting of the constitution to ensure that the parent charity, rather than the individual subscribers, has ownership and control of the company. 

A company limited by shares has shareholders who invest money which is fully at risk: shareholders are last in the line of creditors if the company gets into financial difficulties. In return for these risks, shareholders own the assets, and have full control of the company usually on the basis of one share, one vote. This means it is particularly suitable for trading subsidiaries, where the parent charity, not the subscribers, owns and controls the subsidiary. However, charities must exercise caution about investing large amounts in share capital.

Community Interest Company (CIC)

As the name suggests, CICs are enterprises that are set up to serve a community interest or purpose. CICs are subject to company law, but with additional regulations and their own CIC regulator. Like other types of company, CICs can be limited by guarantee or by shares. CICs cannot apply for charitable status, but are not restricted in their choice of trading activities, as long as they serve a community interest. CICs also have the freedom to make and reinvest profits and raise capital investment.

Like charities, CICs have a statutory asset lock: a legal device that prevents CICs from distributing their assets to their members and shareholders. If a CIC is sold or wound up, any money left over after all creditors have been paid must be handed over to another CIC or charity.

All CICs are required to pass a community interest test before they are registered by the CIC Regulator. This test is based on a simple expression of community interest. CICs limited by shares can distribute some of their profits to member shareholders, but this is strictly limited by a double cap on dividend, that limits the maximum dividend payable on shares, and the proportion of annual profits that can used for this purpose.

Read more about CICs

Industrial and Provident Society (IPS)

Like companies, IPSs are incorporated organisations with limited liability status, but they are subject to their own separate body of legislation. All IPSs have member-shareholders, although share capital in IPSs is very different from share capital in companies:
• IPS share capital can be withdrawn by shareholders
• Individuals are not allowed to invest more than £20,000 in share capital
• Members receive only one vote, regardless of how much they invest
• There is a limit to the rate of interest that can be paid on share capital.

There are two main types of IPS: co-operatives and community benefit societies. Co-operatives serve the mutual interests of their members. Members have a transactional relationship with the co-operative as customers, workers or suppliers. In addition to paying interest on share capital, members of a co-operative might receive a dividend based on their transactions, if the co-operative makes sufficient profits.

Community benefit societies serve the broader community, beyond their own members. They can choose to have a legally-binding asset lock, and can be considered for charitable status if they have charitable objects. 

IPSs registrations are handled by the Mutual Societies section of the Financial Services Authority.

Organisational types

Social enterprise is an umbrella term covering a variety of organisational types, each with its own distinctive organisational practices, purpose and values. The following organisational types all have national membership organisations, which provide further information and support:

• Co-operatives: owned and democratically controlled by their members. Contact Co-operativesUK for further information.

• Development trusts: community-led organisations that develop community assets and enterprises. Contact the Development Trusts Association for further information.

• Social firms: businesses set up to create good quality jobs for people who are severely disadvantaged in the labour market. Contact Social Firms UK for further information.

Follow the link for more information on specialist support agencies for trading and enterprise.

Charitable status

Charitable status is separate from legal form. To become a registered charity, an organisation must have exclusively charitable objects under English law and exist to pursue public benefit, as defined by the Charity Commission. Most legal forms can become charities, with the exception of CICs. Companies limited by shares are normally profit-distributing structures and are therefore not appropriate for charities.

Currently, if a charity wants limited liability status it must register separately as a company or industrial and provident society, although this will change when the charitable incorporated organisation form becomes available. This legal form, expected in 2010, will combine charitable status with incorporation and limited liability status.

The advantages of a trading organisation having charitable status include exemption from income tax or corporation tax and discretionary business rates relief. The disadvantages are the rules restricting the circumstances under which charities can trade (see our page How to trade: Know the rules), and the inability to raise share capital, reducing their competitiveness with private sector businesses.

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