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Structuring success - Getting it right from the start

Sported's Paul Steele looks at considerations for community organisations when choosing a legal structure.

Date: 18th Oct 2021

Author: Paul Steele, Yorkshire and the Humber Regional Manager, Sported

At Sported we aim to support the development of grassroots organisations making change through the power of sport by utilising our bank of skilled and knowledgeable volunteers who provide the resources to help community initiatives thrive. Our work sees us supporting organisations operating at various stages of development, from those which have recently started up to those that are mature and well established.

Structure - options and considerations

An area we often focus on is an organisation’s legal structure and their governance, the bubble in which they operate in and the rules that they adopt. Whilst often this area is not seen as very exciting and does not grab the imagination, it is actually vitally important and if not considered appropriately can hinder development or even prevent an organisation from starting out. As you would expect from many of the groups that we support, a key area is around funding, and as part of our holistic diagnostic process we often find that there can be issues in the organisation’s structure or its governance which may be making it less attractive to funders.

We work with a range of organisational types from community groups, clubs and societies to social enterprises and charities, some of which have company structures and others that are simply set up as an unincorporated group. Within these organisations we and funders often seek specific characteristics to ensure that they are not distributing surplus income to individuals but rather are reinvesting for the stated social purpose, are democratic and that there are transparent governance structures in place which produce robust decision making and which are representative of the communities being served.

Another area we often explore is the approach to risk and liability. We all too often see organisations that were maybe formed many years ago and often as an informal constituted club or a charity which has not adopted company status. Throughout the years they have grown, taken on premises and staff, overseen large construction projects and are possibly even looking to explore contracting opportunities. Throughout this time they have not revisited their structure to review if it is still fit for purpose, and on most occasions the committee or trustees are unaware of the personal risk or liability that they could face if things went wrong. We therefore see it as our duty to explore these risks with organisations and whilst many do not wish to change, we can highlight the need to bring their structure and governance into the 21st century and limit the potential exposure to risk. In addition, there have been more options that have become available to the civic organisations which can cause some confusion as to what is the most suitable.

Traditionally, a small organisation within the sector initially becomes constituted, this is adopting a set of rules establishing how it will operate and under which it will set out its objectives, what it aims to achieve, how it makes decisions, how long committee members serve and, importantly, what it does with any assets if it must wind up. This is the basic infrastructure required to access funding. Some organisations may also adopt charitable status which often provides benefits in terms of rate relief and Gift Aid, with some funders preferring charitable status due to the regulation and restrictions that are required in order to register as a charity and the additional information available in the public domain. A key challenge with these structures is that they are unincorporated: they are not registered as a corporate body and as such the members/trustees have what is called unlimited liability. This means that if the organisation accrued a debt or has a problem which it cannot afford, it does not have its own legal entity, meaning that individuals can be pursued for these debts. These types of organisations are more traditional but as they have grown or evolved they have not reviewed their liabilities and the committee members’ personal exposure to them.

Many organisations can overcome this by forming a company limited by guarantee (CLG). It is formed ideally using bespoke Articles of Association which are essentially its rules and again set out its objectives (often termed its social objectives), its assets and general overarching rules of the company and how it conducts itself. This provides limited liability provided the directors have acted responsibly and within the law and limits member liability to a guarantee, usually £1.

Traditionally, an organisation wanting to become an incorporated charity would form this kind of company and then also apply for registration as a charity which may require more specific clauses to meet the requirements of the sector regulator, the Charity Commission. This has always been somewhat clunky as you would need to submit information to both Companies House and the Charity Commission. Several years ago, a new structure was introduced called a Charitable Incorporated Organisation (CIO) which has provided more flexibility with just one registration – with the Charity Commission – and fewer restrictions to registration.

Social Enterprises would in the main adopt a CLG structure. However, during the mid-2000s a new regulator was formed: the Office of the Regulator of Community Interest Companies. Registering with the CIC regulator can provide a little more protection to funders due to there being less flexibility as there are a number of sections required in the governing document which are fixed and cannot be altered. However, we don’t tend to see any preference from funders for this type and generally there does not appear to be more benefit over a limited by guarantee model without CIC status. For newer organisations that adopt this type of structure it can also present challenges as it is difficult to evolve or change, whereas a company limited by guarantee could for example become a charity quite easily if it was felt that this was conducive to its growth and community impact.

Whilst limited by guarantee models are preferred in terms of funding due to them not being set up to distribute surplus income, organisations can also adopt a share model which also gains CIC status. We do see quite a few of these being formed, maybe by accident and this can cause challenges when trying to secure funding – operating a profit distributing model, these structures are not really suited for grant funding.

Strategy first

As ever with structures it can be a challenging area to understand and we always encourage organisations to start with the strategy to inform their structure rather than establish a structure and then consider the strategy afterwards. This will help define what the organisation aims to do, whether it will trade, how it will secure resources and review what risk factors it will have. Often, if premises are involved the organisation may need to consider not just the legal structure but also, if eligible, whether it should also be a charity so that it can benefit from rate relief. Reviewing this prior to adopting the structure can prevent a lot of challenges in the future and often reduces the amount of time lost in application that cannot be recouped by funding. In addition, we encourage people who look to take a structure to research and understand the pros and cons of each option available to them.

We often find that many directors are unaware of the type of structure their organisation takes and often as to why funders are unable to support them.

Whilst there are a few structures to contend with, just adopting a particular structure alone will not automatically make it eligible for funding. We experience this a lot specifically with Community Interest Companies where a few of the governance tests around non-profit distribution, transparency and democracy may not be met.

Therefore it is important to know there is support out there and getting it right from the start can save a lot of time and resources in the future!!

Sported can support organisations in this area through its range of free support services.

Sported supports a network of 2,600 organisations and groups which operate in communities across the country, providing specialist expertise, resources and operational support. Paul Steele is Sported’s Yorkshire and the Humber Regional Manager.