TO INCORPORATE OR NOT TO INCORPORATE

Tags: Guidance Notes

Many trade associations are “unincorporated”. This means that they have members, a governing body of some kind and a constitutional document that sets out how it will function, but they do not function through a “company”.\r\nOther trade associations are “incorporated” – meaning that a company has been set up and the association operates through that company structure.\r\nA trade association may convert from “unincorporated” to “incorporated” status. \r\n\r\nThis article, developed by Bates, Wells & Braithwaite, gives further details of the implications of being “incorporated” or “unincorporated” and the benefits to be gained from “incorporation”.

1. Unincorporated status

    • An unincorporated trade association does not exist independently of its members (in legal language, it is not a “legal person”). It therefore cannot hold property or enter into (or carry out or be sued in relation to) contracts in its own name (unless it is registered as an employers’ association – see paragraph 4 below). This is not a good thing, since it means that there is no legal entity separate from the members which can provide them with legal protection against claims from third parties in relation to their activities on behalf of the association.

    • The association will have a set of rules that govern its operations. These rules will provide for there to be a governing committee of some kind, whose members will hold property and enter into contracts on behalf of “the association”. This will mean that:

    i) they will hold any “association property” personally and on “trust” on behalf of the members of the association; and

    ii) they will enter into contracts in their own names in respect of the activities of the association, exposing them personally to legal liability.

    Apart from the personal legal exposure which this entails for the management committee members, this arrangement can also give rise to a number of legal complexities in the ongoing running of the association.

    • The association’s rules are a contract between its members, so unless they specifically provide otherwise, they can only be amended by agreement of all the members. This may be what the members want but, particularly as a trade association’s membership grows, this tight restriction on amending and updating the rules can make operating the association difficult.

    2. Incorporated status

    The risk of personal legal liability arising from a trade association being unincorporated can be avoided by becoming “incorporated”.

      • What does it involve?

      Either setting up a company at the creation of the trade association or “incorporating” an association that is currently “unincorporated”. This involves:

      • setting up a company; and

      • transferring the assets of the association to the company

      • What are the benefits?

      i) “Legal personality”

      Legally, a company is a “person” in its own right – separate from its owners - so the company may (in its own name):

      • own property (land and buildings)

      • enter into contracts (including taking out insurance policies and commercial supply contracts and so forth)

      • raise finance by taking loans and giving security over its assets in respect of the loans (or, if it is a “company limited by shares”, issue share capital in itself)

      • sue and be sued in relation to contracts and other legal issues

      This provides protection to the members. The company owns the assets of, and is legally responsible for the activities of the association – not the members or the committee in their own names. The company’s directors are legally obliged to run the company according to the law, but the company is liable if the association is sued.

      ii) “Limitation of liability”

      If it becomes insolvent, the liability of its members to contribute to the debts of the company is limited. Most trade associations are companies “limited by guarantee” and so the liability of members of such companies is limited to the “guarantee amount” stated in the company’s constitutional documents (its memorandum and articles of association). This is usually a nominal amount (of, usually, £1.00).

      3. Employers’ Associations

      To register as an employer’s association certain criteria must be met and the organisation must be entered on a list held by the Certification Officer in accordance with the Trade Union and Labour Relations (Consolidation) Act 1992.

      When this Act, an unincorporated employer’s association enjoys most of the important attributes of corporate personality, i.e. quasi, corporate status: including:

        • it is capable of making contracts.

        • it can sue or be sued in its own name; and

        • proceedings for an offence alleged to have been committed by it or on its behalf may be brought against it in its own name.

        However, all property must be vested in trustees in trust for it. However, any liability of trustees is limited to the funds of the employer’s association. Employer’s association may also be incorporated entries.

        To be registered as an employers’ association, an organisation must either:

          • consist wholly or mainly of employers or individual owners of undertakings or one or more descriptions and whose principal purposes include regulation of relations between employers of that description or those descriptions, workers or trade unions or

          • consist wholly or mainly of constituent or affiliated organisations which fulfil the conditions on head 1 above or themselves consist wholly or mainly of constituent or affiliated organisations which fulfil those conditions or representatives of such constituent or affiliated organisations. The principal purposes of the organisations must include the regulation of relations between employers and workers or between employers and trade unions all the regulations relations between its constituent or affiliated organisations.

          At BWB we advise regularly on appropriate structures for trade associations and membership bodies. We would be delighted to offer you 20 minutes initial free advice on this or any other legal matter relating to your organisations. Please contact:

          Jamie Huardon 020 7551 7866

          Iain Cathcart on 020 7551 7734

          Vanessa Williams on 020 7551 7787

          Selman Ansarion 020 7551 7777

          Bates Wells Braithwaite London LLP

          June 2009

          DOWNLOAD THIS DOCUMENT HERE.

          Download BWBs Trade Association leaflet here.