Legal Structures
One of the most important choices you will make when forming your sports club is which legal structure to adopt.
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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.
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The choices are plentiful (e.g. Company Limited by Guarantee, Community Benefit Society, Community Interest Company, Scottish Charitable Incorporated Organisation etc) and it can seem overwhelming to decide which option to take.
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Detailed below are the main options clubs have when it comes to legal structures.
Legal Structures
Below are the four most commonly adopted legal structures by sport clubs.
01
Charitable Incorporated Organisation (CIO)
The Charitable Incorporated Organisation (CIO) (or Scottish Charitbale Incorporated Organisation - SCIO) is a legal form designed specifically for charities. It is a corporate body like a company or a registered society – but is formed and regulated by the Charities Commission (or OSCR in Scotland) rather than by Companies House or the Financial Conduct Authority. It also provides limited liability; the legislation provides that the members of a CIO are not liable for its debts or other liabilities if the CIO is wound up.
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Unlike other types of legal entity with charitable status, CIOs are only required to report to the Charities Commission (or OSCR) - whereas companies with charitable status must also report to Companies House and charitable community benefit societies must also report to the Financial Conduct Authority. The legislation governing CIOs is also much simpler than the legislation governing companies and community benefit societies.
03
Community Interest Company (CIC)
A Community Interest Company (CIC) is a type of company designed for organisations that want to use their profits and assets for the public good. CICs can be established either as companies limited by guarantee (CLG) (the vast majority of CICs take that form), or companies limited by shares (CLS). CICs have to carry out activities which benefit the community; the community interest test is, however, wider than the tests which need to be met for charitable status.
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The articles of association of Community Interest Companies must include specific wording which, for example, restricts the way in which the assets can be used (i.e. the asset lock – see above), and will generally be more complex than the articles for a company limited by guarantee or company limited by shares without CIC status.
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CIC status brings with it fewer legal requirements than charitable status – but does not in itself confer any special tax advantages. There are no restrictions on payments for CIC directors (providing the level of remuneration is not inconsistent with the community interest test) whereas it is a requirement of charity law that a majority of the board members must not be paid remuneration by the charity. Offering limited liability, and with the protection of an asset lock to prevent its value being distributed, a CIC may be a structure worth considering for your club.
02
Company Limited by Guarantee (CLG)
A Company Limited by Guarantee (CLG) does not have a share capital or shareholders, but instead has members who vote on elections to the board and constitutional issues such as alterations to the articles. Each member guarantees to pay a small amount if the club becomes insolvent (normally £1), hence the name “limited by guarantee” ie their liability is limited to the amount that they guarantee.
The structure is very flexible, and common among not-for-profit organisations such as clubs or charities where membership is frequently changing.
A company limited by guarantee will not pay any dividends to its members, and it cannot be used for community share issues.
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Companies limited by guarantee can have charitable status, but must then adhere to both charity and company law and will have to report annually to both OSCR and Companies House. As an alternative to charitable status, a company limited by guarantee can have Community Interest Company (CIC) status (see below); or it can choose to have neither charitable status nor CIC status.
04
Community Benefit Society (CBS)
As the name suggests, a Community Benefit Society (CBS) exists for the broader benefit of the community - in this case, the community within which the football club is located. CBSs have community benefit written into their governing documents, operate on a democratic one-member-one-vote basis and can be an attractive prospect for grant funders who can be safe in the knowledge that they are giving support to an asset locked organisation (assuming it adopts statutory asset lock).
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CBS are incorporated organisations that carry on a business (in this case, the running of the sports facilities etc) for the benefit of their community. Profits cannot be distributed among members and are instead reinvested into the club or used to support projects within the community.
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A CBS can also issue shares (known as community shares) carrying a capped rate of interest, and on the basis that it will be up to the board to decide whether the club can afford to pay interest each year.
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Organisations can also buy shares in the society; but regardless of how much is invested, everyone is entitled to just one vote at annual general meetings and other members’ meetings.
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Offering limited liability, the ability to issue shares, the opportunity for charitable status and an asset lock to prevent its value being distributed for members’ personal benefit, a CBS can be an attractive legal structure for a club. It should be noted, though, that the Financial Conduct Authority is a much less user-friendly regulator than Companies House, and formal processes at the FCA can be a lot slower. Also, if your rules are not closely in line with an existing model already registered with the FCA, the incorporation process can be much more expensive, and might take several weeks/months to complete. For these reasons it is generally better to choose a different legal entity if you don’t think there is a firm prospect of issuing community shares in the future.
Our Support
To date, we’ve supported the incorporation of over 58 sports organisations across Scotland. This includes semi-professional football clubs such as Annan Athletic (as a Community Benefit Society), New Elgin Juniors (as a Company Limited by Guarantee) and Dunbar United (as a Community Interest Company) and multiple amateur grassroots clubs of all sports and sizes (as Scottish Charitable Incorporated Organisations).
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Our support includes assistance selecting the right legal structure for your club, drafting a suitable constitution for that legal structure, application to the regulator and transferring assets to the new entity. We have club-specific rules/constitutions pre-approved by regulators which can make the process more manageable, not to mention huge experience in the field. We can often clubs with the entire process for as little as £1000 (although a final sum will depend on any complexities/specific requests your club might have – e.g. if you're creating subsidiaries).
Questions to consider
Below are some questions clubs should consider before choosing which legal structure to adopt.
Risks
What are the key risks that you face, now and in the short- to medium-term? Do you need to incorporate, to get the benefit of protection for committee members – thinking about risks from property/leases, building contracts, potential employee claims etc?
Ownership
Who should have control or ownership? Do you want to give the wider community ownership? Or is there a small group of investors who will require ownership as a condition of providing finance? Or should control be limited to regular users of the facilities – or those participating at competitive level - rather than the wider community?
Additional statuses
Will you want additional status? Do you meet the criteria to have charitable status? Are you thinking of Community Amateur Sports Club status?
Sending the right message
What message do you want to give about the nature of the organisation? Do you want to be branded as a social enterprise? Do you want to be seen to be charitable? Or community focused, but not necessarily charitable? Or as an organisation focused on competitive sport only?
Raising finance
How will you raise your capital finance and ongoing revenue? Grants? Loans? Shares? Community shares? Trading? Annual subscriptions? Donations?
Funding opportunities
Are there sources of funding – or other opportunities - which will only be available to you if you adopt a particular type of governance model? Certain funders will only support organisations which have membership open to the local community. Also, there are eligibility criteria (differing between different rights conferred by community empowerment legislation) that would need to be satisfied if you were wanting to access opportunities such as community right to buy.
Tax advantages
Are there tax benefits that you need to access? Are they vital or just nice if you can get them? This might include exemptions from corporation tax on trading income, and/or access to tax reliefs for donors or investors and/or the ability to maximise the benefit of donations by reclaiming tax via gift aid.
Ease/speed of setting up
Ease of setting up. Are you ready to involve other people? How quickly do you need to set up? Are there funders or other key stakeholders that need to be part of the process of developing the new legal structure?
Compliance
Ongoing bureaucracy. Are you geared up to cope with the administrative tasks that need to be carried out? Companies have to notify Companies House of a number of changes, as well as filing annual accounts and an annual confirmation statement, while SCIOs have quite light-touch requirements so far as those aspects are concerned.
Governing Documents
A governing document is extremely important to an organisation; it is the rule book regulating governance of the club. The governing document may start its life as some rules scribbled down as you go along but as your organisation grows and develops you will need to formalise these rules – especially if you are applying for funding, as funders very often ask you to send them your governing documents with any bids that you submit. If you are looking to form a legal entity with limited liability, it will be essential that you have a proper governing document suitable for that legal entity.
The legal form your organisation takes will determine what type of governing document you have, which will be one of the following:
• Rules: for a registered society (co-operative or community benefit society)
• Articles of Association: for a company
• Trust Deed or Declaration of Trust: for a trust (ie a trust in the legal sense; not just a company or SCIO or registered society with “Trust” in the name)
• Constitution: for a SCIO or unincorporated association.
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It is important to remember that organisations have to operate in line with their legal purposes, or objects. In other words your objects determine what you can and cannot do in the future. It is important to get this right at the start – but it should also be borne in mind that it will be possible to amend the purposes set out in your governing document at a later date, if things change.
The key requirement is that the legal structure should reflect the type of organisation that the club wants to be:
• owned and controlled by a group of conventional shareholders who can get financial returns from dividends and from selling their shares; or
• owned and controlled by holders of community shares, with limited interest on shares and the right to repayment after a specified period; and with the balance of profits being recycled within the club or
• applied to community benefit; or
• non-profit distributing, and with membership open to regular users of the facilities; or
• non-profit distributing, and with membership
• open to the local community.
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Other key features include the composition of the board – appointed by major shareholders, or democratically elected by holders of community shares or by the membership; and often with a small number of places reserved for people appointed by the board themselves, on the basis of special skills that they can bring. Governing document templates may be accessed from Club Development Consultancy, tailored to reflect the features that are likely to be most applicable to sports clubs.