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Legal Structures

Legal Structures

One of the most important choices you will make when forming your sports club is which legal structure to adopt.

The same issues can arise at a later stage in the club’s development, when it may be appropriate to adopt a different legal structure – either because there is a need to have a more robust structure to ensure good governance and protection against key risks, given the increased scale of the operations or because there are new opportunities (perhaps those related to the community
empowerment agenda) which can only be accessed if the club
adopts a new structure.

The choices are plentiful and it can seem overwhelming deciding which option to take. It’s worth taking your time over the decision and making sure the structure you choose is right for your club, as each structure has its own strengths.

We’ve worked with the Scottish FA and Burness Paull LLP to provide a detailed guide to help you make an informed choice about which path is best for your club. Otherwise, check out some basic information below.

 

Types of Legal Structures

There are three main types of incorporated bodies for sport social enterprises:

  • Companies: registered under the Companies Acts 1985 and 1989. This includes Community Interest Companies (CIC) which was described as the new legal form for social enterprises when it was launched in 2005
  • Societies: registered under the Co-operative and Community Benefit Societies Acts 1965-2014. To qualify for registration a body must be either a “bone fide co-operative” or a “society for the benefit of the community”, also known as a Community Benefit Society (CBS)
  • Scottish Charitable Incorporated Organisation (SCIO): a new format which gives charities limited liability status, with registration and regulation performed by the Charity Commission.

 

 

Community Benefit Society

Societies are corporate bodies registered under the Co-operative and Community Benefit Societies Acts 1965 -2014. The legislation grants societies the same limited liability status as enjoyed by companies under the Companies Acts.
Societies are currently registered by the Mutual Societies Registration Section of the FCA. The process of registration is more expensive, more complex and slower than that of registering a company. Using model rules – standardised governing documents which have previously been approved by the FCA – can reduce the costs and time taken to register. At least three people are needed to register and maintain a society.
There are two main types of society:
• Bona fide co-operatives – limited profit distribution on an equitable basis is allowable
• Society for the benefit of the community – assets and profits cannot normally be distributed to members and must be used for broader community benefit. Also known as a Community Benefit Society (this is of most relevance to Supporter Groups and clubs).

Special features of societies include –
• Members can invest up to £20,000 in share capital
• Societies can issue “withdrawable” share capital, which can be withdrawn from the society when the member want to cash-in their shares
• Interest paid on share capital limited to “what is sufficient to attract and retain the investment”
• Members have democratic voting powers (one member one vote)
• Co-operatives can distribute some of its profits to members in the form of a dividend on transactions
• Community benefit societies can opt to have a statutory asset lock (sometimes referred to as a prescribed asset lock)
• Community benefit societies can have “charity exempt” status
• Withdrawable share capital exempt from financial promotions regulations

The FCA lists providers of model rules on its website. Co-operatives UK is one of the biggest providers of model rules in the country.

Community Interest Company

“It is intended that the CIC will prove attractive to a wide range of individuals and organisations wishing to participate in social enterprises. CICs will be a useful vehicle for enterprises of all sizes from a small community care project to a large organisation providing international fair trade type distribution systems for the benefit of overseas producers.

CICs could be a useful legal form for holding local assets such as community halls and facilities, as well as for trading in a conventional sense through the provision of goods and services, either directly to the public and organisations, or through contracts with service providers. (Taken from: CIC Regulator Guidance Materials: Part 1 Introduction)

  • CICs can adopt any company format (CLG, CLS or plc) but cannot be registered charities
  • CICs are regulated by an independent CIC regulator
  • CICs must have social objectives that pass a community interest test

In order to determine whether your company satisfies (or will satisfy) the test, you need to consider:

  • the purposes for which it is set up;
  • the range of activities in which it will engage; and
  • who will be seen as benefiting from its activities.

The community interest test is a test of the motivation or underlying purpose of a company’s activities. In order to satisfy the test a company must show that a reasonable person might consider that the purpose towards which its activities are ultimately directed is the provision of benefits for the community, or a section of the community. It is not necessary that each activity carried on by the company must in itself be directly beneficial to the community. But it is important that everything that a CIC does should in some sense contribute towards achieving a purpose that is beneficial to the community.

For example, a company whose activities include manufacturing and selling a particular product does not have to show that product benefits the community – although that might be one way in which it could satisfy the community interest test in relation to these activities. It could equally well satisfy the test by virtue of the fact that the profits from its sales of the product in question are to be devoted to charitable or other community benefit purposes.
In some cases, it will be necessary to take account of possible detriments to the community arising from a CIC’s activities. Clearly, an otherwise beneficial activity which a reasonable person might consider to have materially detrimental consequences for the community or a section of the community (which may or may not be the same community which the CIC aims to benefit) may not satisfy the community interest test.” (Taken from: Chapter 4 CIC Regulator Guidance)

Special features of CICs include –

  • Asset lock
  • 20% dividend cap on shares and 35% cap on proportion of profits that can be distributed to shareholders in CLS CIC
  • 10% interest cap on the average paid by a CIC on all debt or debentures
  • Specific CIC clauses in memorandum and articles of association
  • Requirement to produce annual community interest report

 

Scottish Charitable Incorporated Organisation

The Scottish Charitable Incorporated Organisation is a legal form unique to Scottish charities and is able to enter into contracts, employ staff, incur debts, own property, sue and be sued.  It also provides a high degree of protection against liability.

However, there are important differences between a SCIO and any other type of body with charitable status in Scotland. Before applying, you should be fully aware of the requirements for this form of charitable status. OSCR’s publication, SCIOs: A Guide and their FAQs on SCIOs provide further information.