In theory companies can be incorporated with either unlimited or limited liability, but a charitable company would normally opt for limited liability.
The limited liability company can take one of two forms: a company limited by guarantee or a company limited by shares. The main difference between the two is:
a company limited by guarantee has members who do not make any payment to the company but simply guarantee to pay its debts. Under this arrangement the maximum extent of the members’ liability is limited to an agreed amount, usually £1 per member
a company limited by shares has members or shareholders who purchase shares in the company and have their liability limited to the value of shares purchased.
Charities with substantial financial commitments such as salaries for employees and lease or rental payments are likely to benefit from limited liability status.
The company structure normally used for a charity is a company limited by guarantee, although a company limited by shares may be used for a subsidiary trading company.
Both forms of limited liability company are established through registration with the Registrar of Companies at Companies House. As part of the incorporation procedure two documents must be lodged with the Registrar of Companies, the memorandum of association and the articles of association, which is the company form of organisational constitution. There is an initial incorporation fee payable to the Registrar and also an annual cost in being a company. It is advisable when drafting memoranda and articles of association to consult your professional adviser.
The memorandum of association specifies, often in great detail, what the company may do and what its objects are. It is important to ensure that these are compatible with at least one of the heads of charities. The articles of association are essentially the internal regulations of the company and regulate such matters as the convening and conduct of meetings and appointment and removal of directors.
When a new charitable organisation opts for incorporation the procedure is as outlined above. When an existing charitable organisation decides to change its status and become a company the procedure is different. A new body will be formed and then the entire assets and undertakings of the existing charitable body are transferred to the new company. This transaction must be carefully handled and any organisation contemplating changing status should obtain appropriate professional advice.
The provisions of the Companies Acts are applicable throughout the UK. There are implications for the way accounts are presented and an Annual Return to Companies House must be made.
The Companies Act 2006 will mean real changes for many aspects of company law. It is important to seek professional advice in order to understand how this may affect a charitable company and to establish whether it may be of benefit to a voluntary organisation/charity to ultimately adopt an alternative legal form, for example a Scottish Charitable Incorporated Organisation (SCIO).
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