Introducing Legal Structures

What is a legal structure?

IMPORTANT:  Before deciding on a legal structure it is vital that you obtain professional advice.
Selecting the correct legal structure for a social enterprise is just as important as obtaining finance, preparing a business plan and finding the correct staff.

A legal structure provides the framework to which the organisation will adhere to. To avoid later issues it is vital that the correct legal structure is selected when establishing a new organisation.
The organisations legal structure is contained in two documents

  • The Memorandum of Association.
    • This document details the relationship between the organisation and the outside world and is required when creating and incorporated organisation. This is a public document and it contains the following information
    • the legal name of the organisation
    • statement of intention/objectives of the organisation
    • location of registered office of the organisation
    • list of subscribers (stakeholders)
    • details on distribution of profits
  • The Articles of Association.

    • Contains details about how the company will be run, including:
    • management structure and procedures
    • roles of the members and directors
    • procedures for their appointment and removal of members and directors
    • AGM procedures

These documents are legal documents and together form the constitution of the organisation and you must get the appropriate professional advice when writing or amending them.

A legal structure is either unincorporated or incorporated and for most Social Enterprise organisations the recommendation is to be incorporate and to take one the following structure.

  • Company Limited by Shares (CLS)
  • Company Limited by Guarantee  (CLSG)
  • Company limited by Guarantee  with Charity status (CLSGC)
  • Community Interest Company limited by shares (CICLS)
  • Community Interest Company limited by Guarantee (CICLG)

IMPORTANT:  Before deciding on a legal structure it is vital that you obtain professional advice.

Note: Social Enterprise is not a legal status for an organisation

What is being unincorporated?

IMPORTANT:  Before deciding on a legal status, it is vital that you obtain professional advice.

Being unincorporated means that the organisation has no separate legal identity and all the risks and liabilities that are involved in running the organisation are taken on by the individuals that run or manage the organisation. Unincorporated organisations are normally:

Sole Traders – are individuals who set up a business on their own and are solely responsible for the business e.g. self employed plumber, taxi driver, consultant. There is no requirement for a constitution or registration

Partnerships - are relationships between persons carrying out a business in common with a view to making profit. There is usually a written partnership regulating its affairs. There are no requirements for registration.

Unincorporated associations – are a group of people that join together for a particular purpose e.g. sports clubs, hobby clubs etc. They have a constitution and a board of elected members that run the organisation on the members’ behalf. There is no registration requirement. If a social enterprise decides to be unincorporated this tends initially to be the normal structure
Charities can be unincorporated but are subject to specific charity law that encourages being incorporated.

Benefits of being unincorporated

    • Allows greater freedom of operation
    • Less red tape is required.  Unincorporated organisations only need to comply with normal statutory business obligations of VAT, PAYE, Health and Safety, and insurance
    • Tax Advantages – Sole traders pay tax in arrears and this can help with cash flow.  There are reduced National Insurance contribution for owners who are regarded as being self employed

Disadvantage of being unincorporated

The main disadvantage of being an unincorporated business is that all owners/stakeholders are fully responsible for all the organisations debts and obligations.
If the organisation is planning to do any of the following then serious consideration should be given to becoming an incorporated organisation:-

  • taking on a lease
  • buying  property
  • taking on employees
  • raising finance
  • entering into large contracts
  • charity status

IMPORTANT:  Before deciding on a legal status, it is vital that you obtain professional advice.

What is being incorporated?

IMPORTANT:  Before deciding being incorporated it is vital that you obtain professional advice.

Being incorporated means that the organisation has its own separate legal identity. This means that it is the organisation that enters into contracts, employs staff, purchase property rather than individuals.

Benefits of being incorporated

  • Limitation of risk
  • Clear ownership structure
  • Developing a sense of ownership
  • Public accountability
  • Recognition by financial institutions and investors
  • Availability of equity finance

Disadvantage of being incorporated

The main disadvantage of being incorporated is the administration that is required e.g.

  • Registering the business with companies house
  • Memorandum of  association and  Articles of Associations
  • Submission of annual accounts
  • Stakeholders

Social Enterprise organisations are strongly recommended to adopted an incorporated structure particularly if they are considering

  • taking on a lease
  • buying  property
  • taking on employees
  • raising finance
  • entering into large contracts
  • charity status

The types of legal structures that can be incorporated are

  • Company limited by shares
  • Community Interest company limited by shares
  • Company Limited by guarantee
  • Company limited by guarantee with charitable status
  • Community interest company limited by guarantee

IMPORTANT:  Before deciding being incorporated it is vital that you obtain professional advice.

Company Limited by Shares

IMPORTANT:  Before adopting Company Limited by Shares it is vital that you obtain professional advice.

A company that is limited by shares means that the company:

  • has Shareholders, who own the company and who can:
    • Elect and dismiss the board
    • Appoint or dismiss auditors
    • Approve payments of dividends
    • Change the Memorandum and Articles of Association
  • is Registered with Companies House
  • has a board of directors
  • has a Company constitution as defined in the two documents Memorandum of Association and Articles of Association
  • has limited shareholder liability In the event of the company becoming insolvent a shareholder will lose the money they invested in the company.
  • must publish an annual report, annual audited accounts and any details of changes to the board or amendments to the constitution.
  • may seek funding by selling equity, grants, and loans (secured and unsecured)

There are two types of companies limited by shares

  1. Private (Ltd) - Shares are not offered to the general public and are therefore not traded on the stock market. Shareholders have limited reporting requirements over public companies.

  2. Public (Plc) – Shares are offered to the general public and can be traded on the stock market and have tighter reporting requirements over private companies

It is not common for Social Enterprises or Charities to adopt a Company Limited by Shares approach.
It is important that if adopting this structure the companys’ constitution clearly states its aims and objects and how any profits are to be distributed.

In general Company Limited by Shares is not recommended for Charities.

IMPORTANT:  Before adopting Company Limited by Shares it is vital that you obtain professional advice.

Company Limited by Guarantee

IMPORTANT:  Before adopting Company Limited by Guarantee it is vital that you obtain professional advice.
A company that is limited by guarantee means that the company

  • has no shareholders
  • is a private company
  • has  members who own the company who can
    • Elect and dismiss the board
    • Appoint or dismiss auditors
    • Change the Memorandum and Articles of Association
  • has Members who give a guarantee to cover the companys’ liability. Normally this is a nominal amount typically being limited to £1
  • has Members who have no rights to company profits
  • profits cannot be distributed
  • is Registered with Companies House
  • has a board of directors
  • Constitution is defined in the two documents Memorandum of Association and Articles of  Association
  • must publish an Annual Report, Annual Audited accounts and any details of changes to the board or amendments to the constitution
  • may Seek funding by grants

Company Limited by Guarantee is the normal structure used for non-profit organisations and can be used by Charities

IMPORTANT:  Before adopting Company Limited by Guarantee it is vital that you obtain professional advice.

Community Interest Company

IMPORTANT:  Before deciding to adopt the Community Interest Company structure it is vital that you obtain professional advice.

A Community Interest Company (CIC) is legal structure that is designed for businesses that benefit the community rather than solely to make money. 

A CIC can be a company limited by shares or a company limited by guarantee and have the same benefits and other companies of this type.

Every CIC must

  • Be approved by the CIC Regulator and pass the Community Interest Test
  • File an annual CIC report with its accounts
  • Be registered with Companies House in the same way as a normal company with the same incorporation documents plus a Community Interest Statement
  • Only use its assets and profits for the community specified, or  pass them on to another body with a similar interest (Asset Lock)
  • Keep the community aware of its activities


A CIC cannot be a charity but a charity can own a CIC to run its trading activities. This would allow the CIC to pass its assets to the charity

Advantages of being a CIC

  • Freedom to trade
  • Able to pay directors
  • Do not have to comply with charity law
  • Retain benefits within the community
  • Seek investments, with tax benefits for investors
  • Ability to pay dividends to shareholders (subject to a cap)

Disadvantages of being a CIC

  • No tax benefits
  • Some Charitable Trusts will not fund
  • Additional registration costs
  • New legal structure and not widely known so might not attract investors

IMPORTANT:  Before deciding to adopt the Community Interest Company structure it is vital that you obtain professional advice.

Comparison of Legal Structures

IMPORTANT:  Before adopting a Legal Structure it is vital that you obtain professional advice.

Comparison of Legal Structures | Voluntary Action South Ayrshire

IMPORTANT:  Before adopting a legal structure it is vital that you obtain professional advice.

Choosing a Legal Structure Quiz

IMPORTANT:  Before adopting a particular legal it is vital that you obtain professional advice.

 The following questions may assist in selecting the most suitable legal structure for an organisation.

Incorporated or Unincorporated?

Is the organisation planning on taking out a lease?
Is the organisation planning on buying a property?
Is the organisation planning on taking on employees?
Raising finance?
Entering into large contracts?
Involved in risk?
Does the organisation require limited liability?
Does the organisation require its own legal identity?

If you answer NO to all of the questions then the recommendations for a legal structure are one of the following unincorporated structures

  • Sole Trader (unlikely to be a social enterprise)
  • Partnership
  • Unincorporated association (can be a charity)

If you answer YES to any of the questions then the recommendation for a legal structure is one of the following incorporated structures

  • Company Limited by shares
  • Company Limited by Guarantee
  • Community Interest Company limited by shares
  • Community Interest Company limited by guarantee

Incorporated structures?

Does the organisation require charitable status?

  • Yes - Company Limited by Shares; or Company Limited by Guarantee
  • No - All other incorporated structures are available

Does the organisation plan to raise funds by issuing shares, applying for loans?

  • Yes - Company limited by shares; or, Community Interest Company Limited by shares
  • No - Company limited by guarantee; or Community Interest Company limited by guarantee

Company Limited by Shares or Community Interest Company Limited by Shares

Are the aims of the organisation  only benefiting the community?

    • Yes - Community Interest Company Limited by shares
    • No -  Company Limited by Shares

Company Limited by Guarantee or a Community Interest Company Limited by Shares

Are the aims of the organisation only benefiting the community?

    • Yes – Community Interest Company Limited by Guarantee
    • No - Company Limited by Guarantee