INFORMATION
A Short Guide to Constitutions (PR2)
June 2009
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EDIN 2317899 v 2
Index
Page
Care, Diligence and Skill 2
Introduction 2
Types of Organisation 2
Trust 3
Limited Company 3
Written Constitutions 4
Publications 6
HM Revenue and Customs 6
12 Manor Place, EdinburghEH3 7DDT 0131 226 6051 F 0131 225 9833 Scottish charity no. sc002835
Care, Diligence and Skill:
Scottish Arts Council
A useful handbook for the governing
bodies of arts organisations, this booklet
gives much more detail of the types of
organisations outlined in this Short Guide and their advantages and disadvantages.
Copies with a cover price of £5 are available to order through most bookshops or via TSO and its online shop (p&p extra).
TSO Scotland
The handbook is also available as a free download from the Scottish Arts Council website. See link -
Introduction
Many people working within the artistic community whether as artists themselves or as promoters, managers or supporters of them, do so as individuals frequently working under contract with other parties.
Where two or more people wish to promote artistic skills or to undertake artistic projects it is necessary for them to establish a legal organisation to undertake this. The aims and the rules of operation of the organisation require to be agreed as the foundation of that organisation: these form the “constitution” of the organisation in question.
Generally the only way of accessing funds
from trusts, local authorities or other public bodies is to establish such a legal organisation with a written constitution.
Scottish company law offers a number of types of legal organisation. The three most common legal entities for artistic organisations are:
- The unincorporated association
- The trust
- The registered company limited by guarantee.
As the advancement of the arts and culture for the benefit of the public is a charitable purpose recognised by the Office of the Scottish Charity Regulator (OSCR) it is usual for such entities to apply to OSCR for charitable status which will be granted provided that the constitution of the entity in question complies with the requirements of Scottish charity law.
Types of Organisation
Unincorporated Association
An unincorporated association is a “not for profit” joint venture or project undertaken by two or more people. A constitution must be drawn up which sets out the aims of the project and the way its affairs are directed and managed. The unincorporated association does not have a legal identity separate from its members; it is simply a contractual arrangement between the members of the association which usually provides for its affairs to be run by a committee on behalf of the members and elected by them. Members can have a dual role and serve on the committee.
The advantage of the unincorporated association is that it can be set up quickly and easily without a lot of expense although the process of obtaining charitable status requires that the constitution will comply with Scots charity law. There are two main disadvantages:
- Firstly, the organisation can lack continuity: frequent changes of members can create uncertainty and discourage third parties from lending money or contracting with it.
- Secondly, the committee members incur unlimited personal liability for the obligations and debts of the association. Where this is realised (and it often is not), this discourages people from serving on the committee.
An unincorporated association is therefore not attractive for a group which intends to undertake operations of any significance, to employ staff, to own or lease property, to receive public money, or to assume onerous obligations of any sort.
Trust
A trust is a legal form where the promoters of the project set up a trust to direct and manage the project through the appointment of trustees under the terms of a deed of trust which sets out the objects of the project; provision to the appointment and dismissal of trustees and the powers of the trustees.
Such a trust exists independently of those who form it and it has a legal identity of its own. Many of the problems of the unincorporated association are thus avoided and the liability of the Trustee is generally limited to the extent of the trust funds. However, Trustees can incur personal liability where the trust funds are not sufficient to cover a liability or debt.
Whilst a trust is an appropriate form for managing assets, making grants and carrying out very straightforward attitudes, it is not ideal for a fully operating arts organisation which requires to delegate extensively leading to legal difficulties for trustees who generally cannot delegate and to undertake numerous onerous legal obligations. A trust is a very useful vehicle for the holding of endowment funds
Limited Company
A company is a legal entity totally separate from its promoters and founding members, and as such it can hold property, deal with money and assume legal commitments in its own right.
The directors of a limited company who direct and manage and enter into commitments on its behalf incur no personal liability for the obligations and debts of the company unless they breach their director duties relating to the monitoring of the organisation’s finances.
A company also has the advantage of being capable of incorporation with limited liability for its members.
The most common form of company for arts organisations is one which is limited by guarantee. This means that every member of the company agrees, in the event of the company closing down because it is insolvent, to pay the value of the guarantee, (usually restricted to a nominal sum such as £1), to the company. That guarantee is the limit of their risk.
In a company with share capital, the member’s liability is limited to the share capital which they have contributed, or promised to pay, to the company. This is a convenient entity for an associated company to undertake commercial duties and to gift the profits to the charity.
A company’s constitution is set out in its Articles of Association which cover matters such as the objects of the company, its powers and the arrangements for its direction and management.
The main disadvantages of forming a company are cost and administrative time in complying with company law, such as providing accounts, making company returns, keeping statutory records etc. The disadvantages are generally outweighed by the single most important advantage of limited liability for its members and directors which is a prerequisite for operating organisations taking on multiple obligations for staff, property and various financial arrangements. Administrative requirements for smaller companies have been reduced in recent years making this option more cost effective.
Written Constitutions
Unincorporated Association
The written constitution of an organisation should be clear and unambiguous, using ‘plainspeak’.
In its simplest form a constitution should cover the following points:
Title
- Records the name by which the organisation is known
Objects
- Records what the organisation aims to achieve
Powers
- The means by which the objects can be achieved by the members and the committee
Membership
- Who is eligible and how to join, leave or be expelled from membership. What powers, duties and responsibilities they have (including subscriptions) and to what extent these may be delegated to a committee.
Committee
- How the organisation will be directly managed on behalf of the members. How will members of the Committee be selected, elected or nominated, how long they will serve and how they may be removed.
Office bearers
- Titles, functions and powers of any office bearers, how they are elected and how long they will serve
Meetings: Accounts: Audit
- How the committee will report to the membership and how the committee will direct and manage the organisation.
All the paragraphs mentioned above should be written as clearly as possible to permit easy interpretation. To enable the organisation to adapt to changing circumstances, the constitution should provide a mechanism for making changes, for example by a majority decision at a general meeting.
A written constitution should also include a process for stopping activity and provide for a method of transferring any surplus assets to another organisation. This is essential if the organisation is to be recognised as charitable, in which case special arrangements need to be in place for disposing of any surplus to another charitable organisation.
Trust
The constitution of a trust, called a Deed of Trust should set out the purposes of the trust; the provisions for the appointment and removal of the trustees; it should specify the powers of the trustees; make provision for changing the constitution of the trust and finally provide for ending the trust and transferring the funds to another trust. The creation of the trust will require consultation with a solicitor.
The reason for the one tier structure of a trust is that there are restrictions on trustees’ powers of delegation. This means that it can be difficult for an organisation undertaking many different activities to get trustees who can address all of the issues under the direction and management of the trust.
This is why trusts are really suitable as endowment trusts, holding investments for a charity.
Limited Company
The constitution of a registered limited company is called a memorandum and articles of association shortly to be replaced with a simple articles of association. This constitution will set out the objectives of the company, the arrangements under which the members of the company may be admitted or removed, the arrangements for the creation of a board of directors (on which members may serve in a dual capacity); provision for the appointment and removal of directors together with all necessary arrangements for both general meetings and board meetings.
General
Although special formats and forms of words are used in the formal documents that establish unincorporated association trusts and companies, the underlying basic requirements are not dissimilar. Any group seeking to establish an association company or trust should agree in advance what they consider to be the key features of the organisation which they aim to set up, the objects of the organisation, the arrangement for the appointment and term of members and board members together with the arrangements for direction, management and governance.
Charitable Status
The promotion of the arts for the benefit of the public and in a manner that gives the public full access to them is recognised by OSCR as a charitable objective.
OSCR requires to approve the constitution which require to set out the organisation’s charitable objectives, appropriate arrangements for governance, for example not less than three trustees, board members etc. There are also restrictions on director remuneration and other statutory requirements for the operation of the charity. OSCR publishes a number of useful guidelines relating to the governance and operation of charities.
Corporate Governance
All organisations, be they unincorporated associations trusts or registered companies, require to have regard to the need for good corporate governance: to ensure sound and comprehensive decision-making and effective organisational operation. Whether a committee, a board of trustees or a board of directors, regard must be had to developing effective strategies; the establishment of appropriate organisational structures, proper resourcing; sound appointment of both board members and staff; effective monitoring; the establishment of robust systems of financial control and risk management; good communications, both internal and external, and also regular appraisal.
It is also important that all constitutions address issues of conflict of interest for board members and indeed this is an important requirement of OSCR.
Summary
A formal document need not be formidable and any person thinking about setting up an ‘organisation’ should start by setting down in ordinary words exactly what the organisation is to do, how it should be organised, what it needs to achieve it, who is going to direct, manage and run it, how it is to be monitored and controlled financially and in matters of risk what sort of rules it needs to govern meetings and involved in its membership and how the members will be kept informed. Once these matters are clear the formal constitution be it a simple constituting a trust deed or articles of association will follow.
Those wishing to establish any form of such organisation should seek appropriate advice from a solicitor before embarking on any venture.
Office of the Scottish Charitable Regulator
2nd Floor
Quadrant House
9 Riverside Drive
Dundee
DD1 4NY
T: 01382 220446.
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Publications
SCVO Guide to Constitutions and Charitable Status, Revised Edition 2004, Scottish Council for Voluntary Organisations
This unique and indispensable guide takes you through the whole process of setting up a charity in Scotland or can help with altering your current constitution. It also helps you to decide whether charitable status is appropriate, the best legal structure to adopt, outlines the procedures
for becoming a charity and contains model constitutions approved by the Inland Revenue. £25.00 Voluntary sector, £35.00 Private/public sector.
Scottish Council for Voluntary Organisations,
Mansfield Traquair Centre,
15 Mansfield Place,
Edinburgh EH3 6BB
T: 0131 556 3882
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W:
H M Revenue & Customs
T/F/E: check your local telephone directory for contact details
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Information is provided by the Scottish Arts Council in good faith and accurate at the date of publication. We cannot take responsibility for changes which may subsequently occur.
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