Choosing your legal structure

Use this page to understand what you need to consider when choosing your legal structure and the main characteristics of different legal structures.

How an organisation is set up is known as its legal structure. There are many different legal structures to choose from. Choosing the right one is important as it will affect how your organisation works in terms of:

• who will run it
• whether it can enter into contracts or employ staff in its own name
• who will be liable for what the organisation does.

Here are four points to consider when choosing your legal structure.

• What your organisation does and who is liable
• Whether or not your organisation has charity status
• Who your constitutional members will be
• How your organisation will get its income

What your organisation does and who's liable

An organisation’s legal structure is either unincorporated or incorporated. This determines if the organisation is viewed as being separate from those that run it. It affects how much your organisation’s members and directors are protected against any personal financial liability. The differences between the two are outlined below.

Unincorporated legal structures

• An unincorporated organisation has no separate legal identity from the people who run it.
• This means that the people who run the organisation enter into obligations such as contracts on behalf of the organisation. They are then responsible for its debts and other liabilities. Liabilities is the state of being legally responsible for something.
• Therefore, if you're a charity trustee of an unincorporated charity, your personal assets (such as money, property, or other items seen as having value) are at risk if the assets of the organisation don't cover all the organisation’s debts and liabilities.

Incorporated legal structures

• An incorporated organisation has a separate legal identity from the people who run it. It is a ‘corporate body’. Therefore, as an incorporated structure, an organisation can do the following activities in its own right.
  • Employ paid staff
  • Deliver services under contractual agreements
  • Enter into commercial contracts
  • Own freehold or leasehold land or other property
• Incorporation provides limited liability. For example, in the case of a charitable company limited by guarantee (an incorporated organisation), its member’s liability would be limited to the amount of that guarantee. This would be stated in the organisation’s governing document.

If your organisation has charity status

Charity status is not a legal structure. But whether you have charity status will affect the legal structure you can choose. This is because some legal structures cannot have charity status.

Who your organisation’s constitutional members will be

Your organisation’s constitutional members are individuals or organisations identified in your organisation's governing document. These constitutional members will have certain rights or powers in law to make decisions about how your organisation is run.

Examples of the legal rights or powers of constitutional members typically include:

• to change your organisation’s constitution or governing document
• to decide how money is spent
• to appoint and remove individuals from the board or management committee
• to close down an organisation.

The term ‘members’ can also refer to individuals who don’t have any constitutional rights but simply receive certain benefits from an organisation, such as access to facilities or a newsletter. These ‘members’ do not have any constitutional rights or powers.

Find further information on your governing document.

The difference between a narrow or wider group

An organisation’s legal structure will determine whether your organisation's constitutional members are a narrow or wider group (of individuals or organisations).

• Narrow – simply includes the organisation’s trustees. This is referred to as a foundation model of governance.
• Wider – a wider group of individuals or organisations. This is referred to as an association model of governance.

Some charity legal structures such as a Charitable Incorporated Organisation will allow your organisation to have either a foundation or association model of governance. If your organisation’s legal structure is an Unincorporated Association, your organisation will automatically have an association model of governance. This means a wider group of individuals or organisations will be able to make decisions about how your organisation is run.

How your organisation will get its income

You need to consider how your organisation will generate income. If your organisation plans to be part or wholly funded by grants and donations, you should consider a charity legal structure where charity status is available. Certain sources of grant funding are only available to those with charity status. Charity status also promotes public trust and confidence, encouraging people to donate to your organisation.

Find out about charity status.

If you're looking to generate the majority of your income by selling goods and services, you'll function as a social enterprise and can take on a variety of legal structures. A social enterprise is not a legal structure but a way of doing business.

Find out about functioning as a social enterprise and associated legal structures.

To help you choose the right legal structure for your organisation, this page explains the following.

• The characteristics of the main charity legal structures
• The characteristics of other legal structures

Characteristics of charity legal structures

The table below outlines the characteristics of the main charity legal structures. The table is split into incorporated and unincorporated legal structures. The top row of the table outlines the following information.

• Who controls? Who has responsibility for the organisation.
• Who is the regulator? The organisation that acts as the regulator. Regulators set the rules for how an organisation should be run.
• Limited liability? Whether or not the organisation’s constitutional members are personally liable if the organisation can’t meet its liabilities and has to close down.
• Profit distribution? Whether or not the organisation can distribute its profits to members or shareholders.
• Charitable status available? Whether or not the legal structure allows for charity status.

Incorporated legal structures

Unincorporated legal structures

Other legal structures

There are other legal structures less commonly used by charities and more often associated with organisations with non-charitable purposes. These include the following.

Company Limited by Shares

• Limited by shares, meaning it is owned by shareholders who have certain rights.
• Regulated by Companies House.

Company Limited by Guarantee

• Limited by guarantee, meaning it has guarantors and a ‘guaranteed amount’.
• Many companies that have no charitable purpose also adopt this legal structure.
• Regulated by Companies House.

Community Interest Company (Limited by Shares or Guarantee)

• A limited company, with special additional features, created for the use of people who want to conduct a business or other activity for community benefit.
• Regulated by the CIC regulator and Companies House.

Community Benefit Society

• Formed primarily for the benefit of people who are not members of the society and this must be in the interest of the community at large.
• Regulated by the Financial Conduct Authority.

Co-operative Society

• Formed primarily to benefit its own members who will participate in the primary business of the society.
• It signs up to The International Cooperative Alliances’ values and principles. The International Cooperative Alliance unites, represents and serves cooperatives worldwide.
• Regulated by the Financial Conduct Authority.

Limited Liability Partnership

• A separate legal entity from its members (partners) who are only liable for the amount of money they invest, plus any personal guarantees.
• The partnership is incorporated at Companies House and can only be used by profit-making businesses.
• Regulated by Companies House.

Donor Advised Fund

• An alternative to having your own (or family) standalone charitable foundation.
• Set up with a DAF provider such as CAF Charitable Trust
• Advantages include: cost savings, tax-efficiency, flexibility, and ease of administrative, fiduciary, and reporting requirements.
• Find out more about donor advised funds from the Charities Aid Foundation.

In order to choose the right legal structure for your organisation, we suggest you read additional guidance and get professional advice.

Guidance

• Take a look at our Charity Set Up Tool for a simple guide on the steps to take when setting up and registering a charity.
• Law Works has some free videos on a range of issues related to setting up including:
  • an overview of the different structures available to charities and community groups
  • how to incorporate a charity
  • Charity Commission registration.
• The Thomson Reuters Foundation partnered with Morrison & Foerster and UnLtd to produce a guide which explains the different legal structures and their associated advantages and disadvantages.
• Community Voluntary Service Bedfordshire has produced a rough guide to the legal structures most commonly associated with voluntary and community organisations, including social enterprises. Take a look at their legal structures at glance document (pdf, 49KB).
• Read this guidance from Locality on myCommunity about ‘Choosing the right legal structure for your group’
• The legal structure you choose will determine the type of bank account you are eligible for. Read our guidance on banking for charities and voluntary organisations.

Advice

• Interface Legal Advisory Service can offer legal advice on setting up charities, community interest companies and other voluntary structures. Advice is offered at a reasonable cost, suitable for those with a limited budget.
• LawWorks is a charity which connects solicitors with people and organisations in need, to help provide access to justice through free legal advice. It is currently piloting a service which provides legal advice in relation to setting up and registering a charity. The pilot currently only assists up to two applicants per month. LawWorks recommends applying alongside watching its free videos by solicitors on charity law (select ‘Charitable structures’ as the relevant topic).
• You can listen to a recording of our webinar on ‘Choosing your Legal Structure’ which we hosted in partnership with Withers LLP.
• Take a look at our guidance page on sources of legal advice and assistance for charities, voluntary organisations and social enterprises.