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Different Legal Structures for Time Banks

Many thanks to the NCVO Legal Team for the information provided in this briefing. This briefing contains information on:

1. Introduction: What is a legal structure?
- why you need one and how to choose one
- making the right choice
- governing documents
- do you need to be a charity too?
2. Keeping it simple: unincorporated organisation
3. More formal: the trust
4. Charitable but simple: the Friendly Society
5. Protection from risk: the company limited by guarantee
6. Becoming an Industrial and Provident Society
7. Creating a Development Trust
8. Registering your Time Bank as a Charity (company limited by guarantee model)

TOP TIP
For further information on legal structures visit:
askNCVO website:
askNCVO helpline: Freephone: 0800 2 798 798 or E-mail: .

A good glossary explaining all the different types of structures and social enterprise jargon can be found at:

For further information about setting up your time bank and any questions regarding charitable registration please contact Time Banks UK on . We will help you with advice or refer you on to others that can assist.

1. Introduction: What is a legal structure?

In simple terms, a legal structure is a formal method of organising a project which is acceptable in law.

Why you need one and how to choose one

A group is not required by law to adopt a formal legal structure. It may be possible for your project to achieve its aims without doing so. Basing the operation of your project on purely verbal agreements may work when things go according to plan, but any serious disagreement between members could lead to problems you are unable to solve. Adopting a formal legal structure can provide the framework for getting over such difficulties and also brings with it other advantages, such as credibility when looking for finance. Indeed, some funders insist on formal written Constitutions.

Making the right choice

It is important to know exactly what the implications of adopting a particular structure are, so that you can choose the one which is best suited to helping you to achieve the aims of your project. Your choice should be based on how you want to run the project as well as on what the project is being set up to do.

A legal structure defines what the project aims to achieve (known as the objects) and the means it can use to achieve them (known as the powers). Each of the available structures allows you to do certain things and prohibits you from doing others. It affects whether you are able to:

  • raise money from charitable sources
  • employ staff
  • own buildings and other property
  • involve other local people
  • undertake trading activity
  • make a profit
  • involve workers in decision making.

As long as you adopt the structure which allows you to do what you want, it should safeguard the project from running into legal problems, such as a dispute between members of the project over how it should be controlled and run.

It might be helpful to talk to people in projects similar to your own to find out why they chose the structure they have and if it has caused them any problems.

Model constitutions for some types of organisation are also available and can save you from having to draw up your own, if one exists which is suitable for your organisation to adopt.

The six main types of structure are:

  • an unincorporated association, society or club
  • a trust
  • a friendly society
  • a limited company
  • an industrial and provident society
  • a development trust

The first three of these are unincorporated, which means that the organisation has no separate legal identity distinct from that of the individual members and that the members of its management committee have ultimate personal legal liability.

The last three are incorporated. They have separate legal identity which protects for the most part the liability of the individual members.

Governing documents

All organisations need a governing document – it is your rule book and you must comply with what it says.

It may be called:

  • constitution
  • trust deed
  • memorandum and articles of association
  • some other name.

Time Banks UK is recommending that time banks wishing to become charities should first become companies limited by guarantee and then register as charities. Using this system, your governing document will be memoranda and articles of association. We have made model versions of these documents available as approved by the Charity Commission for England and Wales. For more info see registering as a charity. Time banks that wish to constitute themselves differently might find it useful to look at the NCVO website to find out more at Alternatively, a sample constitution is available for guidance as an email from .

Do you need to be a charity too?

Every charity is a voluntary organisation but not every voluntary organisation is a charity. While you are choosing the legal structure most appropriate to your project, you should also consider whether or not you want your organisation to become a charity. In appropriate circumstances, an organisation can become a charity regardless of which of these structures it adopts.

Briefly, the main advantages of charitable status are:

  • exemption from most forms of direct taxation
  • a good public image, which helps when fund raising
  • eligibility for help, especially financial, from other charities.

And the main disadvantages are:

  • the Charity Commissioners in England and Wales (and the Inland Revenue in Scotland) have controlling powers
  • an organisation’s objects must all be legally charitable
  • there are restrictions on the alteration of objects and on dissolution
  • committee members cannot normally be paid.

The main test for being granted charitable status is that all and not just some, of an organisation’s objects must be charitable. You need to draw up your Constitution with this in mind since it could affect how you state the objects of your project.

If what you are doing is charitable then you have a legal obligation to register if your income exceeds £1000 from all sources. The Charity Commission (Registration Division) has a list of organisations that have produced model Governing Instruments and this includes the NCVO.

See registering as a charity.

2. Keeping it simple: unincorporated association

If you want to set up an organisation for a limited, specific and probably local purpose, then you should consider choosing the simplest form of legal structure - the unincorporated association. This means that the organisation has no identity in law except as a collection of individuals. Members of the management committee are ultimately personally liable for the organisation’s debts.

An unincorporated association can become a charity; have full choice in appointing officers and committee members and easily dissolve itself (at a general meeting of members) - but

An unincorporated association cannot hold property without appointing custodian trustees to do so on its behalf; take legal action, borrow money or enter into any form of contract in its own name, but must do so in the name of one or more individuals.

The advantages are...

  • It is cheap to set up. Unlike incorporated structures there are no fees to pay
  • It can be set up quickly. You do not have to involve any other organisation (unless you are also applying for charitable status)
  • It is flexible. It can suit a wide variety of groups, objects and ways of working
  • It is not subject to interference. Some other forms of legal structure are answerable to a statutory authority.

The disadvantages are...

  • It cannot hold property in its own name. It must have trustees to hold it in their own names on behalf of the association
  • Members of the association’s management committee, or the trustees, are ultimately personally liable for the association’s debts.
    Example: An unincorporated association buys a computer on hire purchase and then finds it cannot keep up payments. Whoever authorised the hire purchase agreement on behalf of the group is legally responsible for paying off the debt
  • The lack of control from an outside body leaves an organisation vulnerable if there is a dispute between members. A friendly society can refer a dispute to the Registrar of Friendly Societies
  • It is difficult to borrow money. Money will only be lent to members of the management committee as individuals, who will be personally responsible for its repayments, even though it is used exclusively to finance the association.

So, if your group...

  • is small
  • operates on a small budget
  • does not need to employ staff or acquire property or contract with third parties and
  • wants participation by its membership (from which the management committee will be drawn)

then an unincorporated association may be right for you.

3. More formal: the trust

A trust is a body that manages money or property for clearly defined purposes. It establishes a relationship between three parties - the donors of money or property, the trustees and the beneficiaries. The purpose for which the money is to be used is specifically stated in the trust deed. Although the trustees become the legal owners of the trust property, it can be unlawful for them to benefit personally from it

A trust can register as a charity; hold property; raise funds - for the objects of the organisation stated in the trust deed and trade - as long as it is not a primary aim of the trust and is specifically authorised in the trust deed.

The advantages are...

  • It can be set up quickly and fairly cheaply. Apart from seeking approval for the trust deed from the Charity Commission there is no need to involve any outside body. There are no registration fees to pay, although it will usually be necessary to employ a lawyer to advise on drawing up the trust deed
  • It can be cheap to run. There is no requirement to pay annual fees for the submission of accounts to an appropriate authority. However, the organisation is subject to the requirements of trust law so that the trustees must keep proper accounts (which can involve expense)
  • The trust deed can be easily amended, if provision to allow for changes in the deed was made when it was originally drawn up. (However a deed which allows for the objects clause to be amended will not be acceptable to the Charity Commission)
  • There is no interference from outside authorities in the administration of a trust.

The disadvantages are...

  • The type of management structure it imposes is unitary and probably unsuitable for a group which wants participation of a membership in decision-making. The power lies with the trustees. Unlike a company, where ultimately the members can remove the directors if they do not act in accordance with their wishes, there is no such democratic method for removing the trustees of a trust. So if, for example, the beneficiaries do not think that its trustees are using their powers effectively, they have no authority to compel the trustees to change their ways. Since the removal of trustees is difficult and trustees are not usually elected to a fixed term of office but are there until they resign or die, such differences of opinion can be difficult to resolve. It is possible within the framework of a trust to reduce the possibility of this type of conflict arising by having an express provision that trustees must stand down after a fixed period.
  • Trustees may be personally liable to the trust for any loss resulting from their actions which are in breach of trust, even in cases when the trustee believes he is acting in accordance with the purposes of the trust.

Because the trust is unincorporated, a trustee is personally liable for contracts he enters into on behalf of the trust. However, if he has acted honestly and reasonably, he may be entitled to reimbursement from the trust property for any loss he personally suffers in fulfilling his duties as trustee. In practice, personal liability can be limited by writing into any contract, with the agreement of the other party, that it is being undertaken on behalf of a trust.

Transferring property to new trustees can be expensive. This problem can sometimes be overcome by using the services of the Official Custodian for Charities who can act as a holding trustee for land.

So...

  • If your aim is to raise funds for a special purpose or to run a project with limited objectives
  • if you want to adopt a formal structure fairly quickly and cheaply and
  • if your organisation does not require the active participation of a membership

then a trust may be right for you.

4. Charitable but simple: the Friendly Society

If you are a small group that wants the benefits of charitable status, without too many complications, then consider the friendly society. Friendly societies are registered under the Friendly Societies Act 1974.

The friendly society is unincorporated. Traditionally, its function was to pay insurance benefits to its members; now it can be any voluntary organisation with a benevolent purpose. It must have a minimum of seven members and a registered office.

A friendly society can become a charity; hold property through trustees; convert into a company.

Once a friendly society with charitable objects has registered with the Registrar of Friendly Societies, it is exempt from the requirement to register with the Charity Commissioners, and does not have to submit annual accounts to them. The Charity Commissioners have no authority to inquire into the society’s activities.

The advantages...

  • There is fairly cheap arbitration in the case of disputes (through the Registrar of Friendly Societies)
  • Property can be transferred easily and without cost. Unlike a trust, a friendly society does not have to pay the usual legal fees involved in transferring property since on the death, resignation or removal of a trustee, all property held in his or her name automatically passes to the succeeding trustee
  • Achieving charitable status is often more straightforward
  • Friendly societies can amalgamate easily.

The disadvantages...

  • The privacy enjoyed by unincorporated association disappears when an organisation registers under the Friendly Societies Act
  • The Registrar will want a copy of the society’s rules, a valuation of its assets, and a regular audit of its accounts
  • The freedom from interference from outside authorities also disappears. The Registrar has the power to investigate the affairs of the society and has the right of control over some of its activities. He can prohibit the society from accepting new members if he thinks the circumstances warrant this.

So...

  • if yours is a small organisation that requires charitable status
  • if you anticipate transferring property between trustees and want to avoid expensive legal fees and
  • if you wish to remain unincorporated

then the friendly society may be right for you.

5. Protection from risk: the Company Limited by Guarantee

If your organisation seeks a democratic form of control, has a fairly substantial turnover, employs staff, owns or occupies premises and you wish to protect the personal assets of the management committee, then you should consider registering as a company limited by guarantee.

The company limited by guarantee is the type of company normally chosen by voluntary organisations and community groups because:

  • it is designed for non-profit making organisations
  • its structure is essentially democratic - the members control the company - unlike a trust
  • each member’s liability is limited to a nominal sum - usually not more than £1, which he or she guarantees to pay if the company has debts on winding up.

The other type of limited is the company limited by shares. Here, members invest money in the company by buying shares. Their liability is limited to the nominal value of their individual shareholdings. Shareholders participate because they hope to make a profit. This type is not suitable for charities.

In the company limited by guarantee, the incentive to participate is not profit, but commitment to the objects of the organisation. Members cannot benefit from any profits made - they have to be reinvested in the company.

A limited company must submit its constitution to the Registrar of Companies. The constitution consists of two parts:

  • Memorandum of Association which states the objects of the organisation, the powers of the company has to pursue its objects and the extent of the liability of the members on winding up.
  • Articles of Association which state the rules governing how the company is to be run, including proceedings at meetings, voting procedures, accounting procedures and the method of electing the committee of management, usually referred to as the board of directors.

See registering as a charity.

A company limited by guarantee can become a charity provided that all its objects are charitable and hold property without appointing trustees to do so on its behalf.

The advantages...

  • Owning and transferring property is simplified - no trustees have to be appointed as nominal owners.
  • The personal property of the members is not usually at risk if the company is liable for debts.
  • A company undertakes all its activities in its own right, including taking legal action.
  • It provides a democratic structure - the members elect the directors (management committee) and have the right to remove them.
  • The Companies Act 1985 provides a ready-made constitution, easily adapted to meet the needs of different groups.
  • The company framework is suitable for any size of organisation, so a small organisation can expand without being restricted by the structure it has adopted.
  • It is usually easier for an incorporated organisation to borrow money - the lender has the security of the company’s assets, rather than the personal security of the individual who signs the contract.
  • Only two people are needed to form a company - a friendly society and an industrial and provident society require a minimum of seven members.

The disadvantages...

  • A company limited by guarantee is subject to more controls than any of the other legal structures.
  • There is a lack of privacy. Information on a company’s activities is submitted to the Registrar of Companies and is available for public scrutiny.
  • The initial costs can be high including:
    - a registration fee of £20
    - legal fees to a lawyer for assistance in establishing the company
    - a recurring fee (currently £15) for submitting annual returns
    - recurring administrative costs, including auditing fees, through having to comply with the Companies Acts.

So...