Pros and cons of incorporation
Incorporation means the creation of a legal identity for an organisation: a corporate body. In an unincorporated body the law doesn’t distinguish between the organisation and its members. A corporate body, however, is considered to be a person in its own right.
Members of an unincorporated organisation are jointly and severally liable for all the actions of the organisation. If the organisation enters into liabilities, such as employing workers, borrowing money, or entering into contracts with customers, there is a risk that it could end up owing money it does not have and cannot earn. In such circumstances the members must repay all the debts in full. Jointly and severally liable means that creditors can ask any members they chose to repay the debt.
The main advantage of incorporation is the protection provided by limited liability status. This means that members only risk losing their original equity investment (if they are shareholders) or, if the organisation has a guarantee structure, the amount they guaranteed (usually £1). Incorporation means that it is the corporate body, not its members, that owns property or enters into contracts. The corporate body is fully liable for its debts. This liability does not transfer to its members, unless those members have acted outside of the law (ultra vires). Incorporation also provides a secure structure for members to invest in the organisation and for risks to be shared equally.
There are drawbacks to incorporation, primarily the cost of registration, making annual returns, administration and regulation. These costs may outweigh the benefits of incorporation for small organisations, especially if they have no exposure to liabilities.
For more information, check out this guide we produced for community sport clubs on legal structures in association with the Scottish FA and Burness Paull.