When starting up a new group or organisation, you must decide on what legal structure it is going to take. This is necessary, to define your organisation and to establish the liability of those running the organisation. There are various formats that can be used and the one that you choose will be dependent upon the circumstances of your group.

The most usual legal structures are outlined here.

The Unincorporated Organisation or Society

This is the most commonly adopted form used by voluntary organisations in Scotland. It must be established and regulated by a constitution. The main advantage of using this format is that it is inexpensive and quick to set up which is good for a smaller group.It also offers a fair amount of flexibility as there are no formal, statutory rules to abide by. (However, if the organisation is to become a charitable body, the constitution must be acceptable the Scottish Charity Regulator (OSCR) which is now the body in Scotland to whom applications for charitable status must be made. It grants charitable status, regulates charities and keeps a public register of charities, the Scottish Charity Register. Full information on this can be found on the Charitable Status page of the Toolbox.

The main disadvantage of being an unincorporated body is that of liability. The members of the management committee can be made personally liable for any of the organisation’s debts, which may make it difficult to borrow money.

Company Limited by Guarantee

This form is becoming increasingly popular amongst community groups and organisations, especially when they hold property and employ staff. It involves the actual registration of a company limited by guarantee and regulated by the 1990 Companies Act.

The main advantage to being registered as a Limited Company is that liability for any debts is limited to an amount set out in the constitution and gives the company its own identity, separate to that of its members. It also means that the organisation can own property in its own right, is able to borrow money more easily and is subject to the democratic control of its members.

Registering as a Limited Company does involve the legal expenses of setting up, including a registration fee and it will also be required to lodge annual accounts prepared by qualified auditors which can be costly. The Company Directors do have statutory duties and if these are breached they can be subject to criminal charge.

An organisation setting up as a Limited Company can apply for Charitable Status, as long as its Articles and Memorandum are drawn up in a form that is acceptable to the Inland Revenue.

Community Interest Companies (CICs)

Community interest companies (CIC) are a new type of limited company designed specifically for those wishing to operate for the benefit of the community rather than for the benefit of the owners of the company. This means that a CIC cannot be formed or used solely for the personal gain of a particular person, or group of people.

CICs can be limited by shares, or by guarantee, and will have a statutory “Asset Lock” to prevent the assets and profits being distributed, except as permitted by legislation. This ensures the assets and profits are retained within the CIC for community purposes, or transferred to another asset-locked organisation, such as another CIC or charity.

A CIC cannot be formed to support political activities and a company that is a charity cannot be a CIC, unless it gives up its charitable status. However, a charity may apply to register a CIC as a subsidiary company.

A Trust

A Trust is formed by a small group of people known as the trustees, who are the legal owners of the organisations money and property. It is ideal for charitable purposes,such as a grant-making trust ,where a benefactor has made over property including money to named trustees who are responsible for administering these assets in accordance with the benefactors wishes These will be laid out in a formal Trust Deed. A Trust may also be set up for the purpose of holding property, for example a village hall.

Trusts do not have members and the trustees are personally liable for the actions of the trust. As it does not have members it is not a democratic body and trustees can be difficult to remove.

A Trust is relatively inexpensive to set up and is not regulated by any statutory bodies other than the Inland Revenue who set down legal requirements in respect of taxation.

Co-Operatives and Industrial and Provident Societies

This type of organisation must be one which is for the benefit of the community. Membership should be free, open and in no way discriminatory. Co-operatives are democratically controlled by their members, and any returns on capital must be at a strictly controlled rate.Any economic benefits must be distributed fairly.

If an organisation wishes to register as an Industrial and Provident Society, the Registrar will ensure that the group runs on co-operative principles. It may be suitable for a community group who want to trade in their own right such as a community shop or food co-operative.

Friendly Society

Not a commonly used format but one that can be adopted by a group with a benevolent purpose. Once registered with the Registrar of Friendly Societies,
the group can apply for charitable status and hold property.