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Part 2 : A guide to different legal structures

Choosing and preparing a governing document

Whether you run your childcare business as sole trader, partnership, voluntary management committee or charity, the liability, both legally and financially stays with the individual, committee member or trustee and this could put your personal assets at risk.

It is possible to limit your liability and protect your personal interests by changing the legal status of your business to a limited company. This is called incorporation.

Unincorporated associations (constitution)

Many clubs are non-profit making organisations and are by definition unincorporated associations. An unincorporated association is an organisation set up through an agreement between a group. The organisation will be personally responsible for any debts and contractual obligations. This is not a legal structure, so the association will not be recognised by law, meaning individual members are personally reliable. You would normally choose to use a constitution and once completed, you will then have an unincorporated status.

This may be a suitable structure for organisations that:

  • Do not anticipate having significant property e.g. holding a lease
  • Have sufficient income so that all financial obligations can be met
  • Do not anticipate entering into long term financial contacts
  • Do not employ significant numbers of staff
ADVANTAGES DISADVANTAGES
Quick and easy to set up Cannot acquire property in own name
No fees to pay Legal proceedings can’t be taken by group but individuals representing group
Privacy Personal liability of management committee
Flexibility (democratic constitution) Lack of charitable status may affect ability to apply for funding
Wound up easily (as per constitution)

Company limited by guarantee (memorandum of articles of association

Company limited by guarantee is a structure that protects the directors of the company. An application form will need to be completed, along with a memorandum and articles of association, which Companies House can provide and submit with the fee to Companies House. Once the company has been established the directors will be able to run the business, employ staff and enter into contractual agreements under the company name. The directors will need to adhere by company law and will need to purchase insurance cover, employer’s liability, public liability and any other insurance that needs to be taken out.

This may be a suitable structure for organisations that:

  • The group employs or expects to employ a significant number of staff
  • The group owns or expects to own land, buildings, investments or other substantial property
  • The group is or expects to be involved in activities, leases or contracts where there is financial risk
  • The group has or expects to have a substantial income, assets and liabilities
ADVANTAGES DISADVANTAGES
It is ‘incorporated’ – has its own legal identity Activities regulated by Companies Acts – more controls  and bureaucracy than other structures
Can buy, own and sell property in own name Annual accounts and returns must be submitted to Companies House and fees paid
Can take or defend legal proceedings in own name Company must notify Companies House when Committee members leave or join or if personal details change
Limited liability of members and directors
Generally democratic organisations

Community interest company

A community interest company is one of the more common legal structures chosen for a social enterprise. As a social enterprise, you will be able to access support from network groups, access training and will be more able to access grants and funding.

This may be a suitable structure for organisations that:

  • Are not looking to make a profit and the purpose is to support the local community. (social enterprise)

You will need to be submit an application to Companies House together with a completed CIC 36, a Community Interest Statement and a memorandum and articles of association. The articles of association are very different for a C.I.C as they have an asset lock. An asset lock determines what you will do with any finances or equipment in the event that the business closes. When completing the asset lock, you can nominate another similar group that you would like to receive any resources or funds from the closure of your business, if you are unsure you can nominate a group at a later date once the business is established.

When Companies House receives an application for a C.I.C, it is immediately referred to the C.I.C regulator. Companies House will check the paperwork to ensure that you meet the right criteria to establish a company, the CIC regulator will check the Memorandum and Articles of Association and the CIC36. Once this has been cleared, the CIC will need to produce annual accounts for Companies House and complete a CIC34 for the regulator. There is a fee however, and this can take up to 28 days to be completed.

Unincorporated charity

To become a registered charity, this requires the formation from a board of trustees and an application to the Charity Commission. Details need to be given of the trustees and once complete, you can apply to become an unincorporated charity.

The Charity Commission application form will need to be completed, along with the objects of the charity and a signed constitution. This can be either bespoke or a model constitution, both with can be provided by the Charity Commission.

However, any trustees will not be protected and the individual of the unincorporated organisation will hold the responsibility for any risks, costs, liabilities or consequences.

Annual accounts will need to be provided to the Charity Commission and must comply with the requirements of a charity. As a charity, you will be able to apply for grants and funding from different organisations, you will also be able to hold different events to raise funds for your organisation.

What to do next

The Early Years Business Team can help you to decide what business model is best for you.
Call us on 01454 862368 or email earlyyears@southglos.gov.uk