UNINCORPORATED ASSOCIATIONS Quick Guide
Unincorporated Associations An unincorporated association is an organisation which is established when two or more persons come together for a common purpose other than to make a profit. This is a legal form commonly adopted by members’ clubs, sports clubs, charities and other not-for-profit organisations. The key criteria for an unincorporated association are that it will:(a) consist of two or more persons with a non-business purposes; (b) have contractual relations between those persons; (c) be governed by rules; and (d) be non-temporary. The affairs of an unincorporated association are usually managed by a committee chosen by the members.
Advantages The main advantage to being an unincorporated association is that it is easy and cost-effective to establish. Although there is a degree of legal uncertainty over the point at which an unincorporated association comes into being, this usually happens on the adoption of a simple agreement between the members of the unincorporated association. This agreement outlines the members' duties and liabilities to each other. Another advantage is that unincorporated associations is that there is no need to register an unincorporated association nor pay any fees to formalise its formation. Although some organisations will be registered charities and therefore regulated by the Office of the Scottish Charity Regulator (OSCR), unincorporated associations generally do not need to be registered with any regulator. This means that there is a greater degree of privacy for unincorporated associations than there is with other legal forms which are regulated (such as a limited company). Last but not least, it is relatively cheap to establish and operate an unincorporated association. There are no statutory regulations as to how unincorporated associations must be run. There are no registration fees and no requirement to prepare and file annual accounts or reporting requirements.
Disadvantages and issues The main disadvantage to being an unincorporated association is that the current law in Scotland does not recognise the unincorporated association as a legal entity distinct from its members and its management committee. The lack of separate legal personality of unincorporated associations sits at the root of many of the problems that third parties encounter in dealing with such organisations. An unincorporated association cannot in its own name:
enter into contracts;
employ staff; or
take on a lease or own property.
It is also far from clear to what extent an unincorporated association can sue or be sued in its own name in the Scottish courts. The absence of separate legal personality creates a twofold risk - for third parties dealing with such organisations on the one hand, and for members of the unincorporated association on the other. The risk stems from the fact that members of such organisations, and in particular committee members, can be held personally liable for contracts which they enter into on behalf of the unincorporated association. As it is not possible for an unincorporated association to enter into a contract directly in
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its own right, contractual liability will ultimately rest on those who have authorised the contract. For instance, if a committee member was to enter into a contract to purchase goods and the contract was authorised by the management committee, each committee member could be held liable under the terms of the contract should the terms not be fulfilled. Personal liability of committee members is not simply restricted to commercial contracts. A member of staff who has been employed by the management committee or by an individual committee member with the authority of the management committee would have a right of recourse against any of the committee members for any breach of their employment contract. Furthermore, in certain circumstances committee members can be held personally liable to compensate a third party for harm they have suffered as a result of the wrongful actions of the association. Examples of such wrongful actions could include a negligent act causing personal injury, causing nuisance to a neighbour or simply the making of a defamatory remark. Unincorporated associations can take steps to minimise the abovementioned risk such as including an indemnity in favour of the committee members in its constitution and/or taking out a policy of insurance. Finally, because an unincorporated association has no separate legal capacity, property must be held by individuals on behalf of the association. For example, if a committee member owns or leases property in their own name and that committee member leaves the association, the departing member’s interest in the property will need to be transferred. This can often be overlooked by unincorporated associations which have a higher turnover of committee members than others.
Thinking about incorporation? It might be advantageous for an organisation with a small membership to start off as an unincorporated association because of the advantages mentioned above. However, if the membership grows and the organisation's affairs become more complex, the uncertainties surrounding the association’s lack of separate legal personality might motivate members to think about alternative legal forms. In such circumstances, there are several alternatives which the members of an unincorporated association may consider. Incorporation as a company limited by shares or by guarantee Limited companies have separate legal personality from their members. The directors of a limited company have legal responsibility for the day-to-day management of the company and they have limited liability in most cases, provided that they comply with their statutory duties. In a company limited by guarantee, each member guarantees to pay a set amount of money towards the debts of the company if it ever become insolvent (this can be as little as £1). Companies limited by guarantee are usually the preferred choice for not-for-profit making organisations. In contrast in a company limited by shares, each shareholder will make a payment to the company in return for the issue of shares but their liability will be capped at the amount invested (or the amount of any unpaid share capital). Limited companies are subject to statutory and filing requirements. In addition, certain information about the company and its officers will be freely available on public record. Incorporation as a Community Interest Company (CIC) CICs are limited companies with special additional features which operate to provide a benefit to the community. They are regulated by the Community Interest Companies Regulator. Although this legal form can be seen as a hybrid between a charity and a company, it is not a charity and as such does not enjoy the benefits, nor have the same compliance regime, as a charity. CICs are permitted to make a profit so long as the profits are invested in the community and not used solely for the benefit of private investors (known as the asset lock). CICs have separate legal personality and the liability of the directors is limited in most cases.
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An additional filing requirement applicable to CICs is that they are required to submit an annual community interest report together with their annual accounts. The report must be filed with Companies House and copied to the CIC Regulator. The report must include details of the remuneration of the directors and any dividends paid to shareholders. CICs can only cease to exist by dissolution or by conversion to a charity or a registered society. CICs cannot convert to become a non-charitable company. However, an existing limited company can be converted into a CIC. Incorporation as a Scottish Charitable Incorporated Organisation (SCIO) SCIOs are a relatively new legal form which allows charities to be incorporated but to be administered and regulated by a single body, OSCR. As with a limited company, a SCIO is a legal entity in its own right and enjoys the advantages which come with separate legal personality. The members of a SCIO are not, however, required to contribute to the assets of the SCIO upon its winding up. A feature unique to SCIOs is that their existence is entirely dependent upon their charitable status. If a SCIO loses charitable status, it ceases to exist. This is in contrast to the position with companies or unincorporated associations which are charities as they would continue to exist in the event that charitable status was ever withdrawn. Incorporation as a mutual society or as a friendly society Mutual societies incorporated under the Industrial and Provident Societies Act 1965 are an option but they are rarely used nowadays since the introduction of CICs. An association with a benevolent purpose may be registered as a friendly society under the Friendly Societies Act 1974. The advantages of this are that the legislation provides a framework within which the organisation can carry out its activities. However, unincorporated associations are now discouraged from registering as friendly societies.
Next Steps We hope this assists you in understanding the nature of unincorporated associations and to allow you to start considering the relevant issues. We are of course happy to discuss any aspect of this note further.
Paul Geoghegan Partner E: paul.geoghegan@morton-fraser.com T: 0141 274 1118
Adrian Bell Partner E: adrian.bell@morton-fraser.com T: 0131 247 1113
Edinburgh 0131 247 1000 | Glasgow 0141 2741100 | www.moton-fraser.com