Setting up YouScotland as a Limited Company
A paper from the Steering Group
Launch meeting
9 June 2007
Issue
YouScotland needs to become established as an organisation, accountable to its members, with a constitution, bank account, office bearers etc
Background
At its meeting on 25 April 2007 the Steering Group considered the advantages and disadvantages of a range of options and identified the type of organisational framework it should pursue. It agreed that YouScotland will:
be a membership organisation;
be a company limited by guarantee; and
not seek charitable status.
A limited liability company is established through registration with the Registrar of Companies at Companies House in Edinburgh. As part of the incorporation procedure two documents must be lodged with the Registrar of Companies, the Memorandum of Association and the Articles of Association, which is the company form of organisational constitution.
Limited Company status requires that a Board of Directors be formally constituted. This will be done but the Steering Group proposes that the day-to-day core business and policy direction of YouScotland should be facilitated by a much wider Advisory Group and this is set out in the draft Memorandum and Articles.
Further details of the background to these decisions is at the Annex.
Discussion
The attached paper contains a draft Memorandum of Association and Articles of Association for YouScotland.
Recommendation
Members online and present at the meeting are invited to:
Consider and, as appropriate, amend and agree the draft Memorandum and Articles;
Agree the spirit of the draft Memorandum and Articles; and
Invite the Steering Group to take steps to finalise and formalise the Memorandum and Articles with a view to establishing the Limited Company as soon as is practical.
Enquiries
Jane W Denholm
j.denholm@criticalthinking.co.uk
0131 220 4520
Annex
Setting up You Scotland as a limited company
Why a Limited Company?
A company limited by guarantee has members who do not make any payment to the company but simply guarantee to pay its debts. Under this arrangement the maximum extent of the members' liability is limited to an agreed amount, usually £1 per member.
The main distinction between a voluntary association and a limited company (and interest from YouScotland’s point of view) is that the limited liability company format provides a very substantial level of protection against personal liability for members. Although SCVO points out that it must be noted that the limit on liability does not extend to any liability which a person might incur in his/her capacity as a director of the company, as distinct from his/her capacity as a member. There are a range of legal duties imposed on directors of a limited company which could give rise to personal liability. SCVO states that ‘broadly speaking, however, it is extremely unlikely that a director would find himself/herself personally liable as a matter of practice, unless s/he acted in a manner which was highly irresponsible. It is important, though, that those involved should have a reasonable understanding of what is involved in relation to their duties as directors’.
SCVO also considers that, so far as the disadvantages are concerned, the registration requirements should not be regarded as a major obstacle. At the end of the day, this is largely a matter of completing the appropriate forms. Similarly, SCVO considers that ‘the dangers of encountering a significant problem with Companies Acts procedures tend to be overstated’. SCVO provide further guidance in detail on all of these matters.
Company limited by guarantee – advantages and disadvantages (from SCVO)
The advantages associated with a company limited by guarantee (as compared with a voluntary association) are as follows.
limited liability - in terms of a clause contained in the memorandum of association (part of the company’s constitution) each of the members undertakes (“guarantees”) to pay up to a nominal sum (normally £1) towards the company’s debts if it goes into liquidation. The members’ liability is therefore limited to the sum which they guarantee to pay, hence the name “company limited by guarantee”
the company is a clear legal entity, separate from the people involved in it - and can therefore hold property, enter into leases and other contracts, employ people, etc in its own name. That, in turn, introduces an important element of continuity since none of these would be affected even if the whole board were replaced by a new set of people
a company is generally regarded by funding bodies and public agencies as a more “stable” structure than a voluntary association
The disadvantages associated with a company limited by guarantee (again, as compared with a voluntary association) are as follows:-
there are formal registration procedures to be followed in relation to creating a company, in addition to the process of applying to be recognised as a charity
there is an ongoing requirement to notify a change in directors, a change in the company secretary, or a change in the registered office, to a public register (Companies House). Similarly, annual accounts and annual returns have to be filed with Companies House
there are various statutory requirements which have to be followed in relation to members’ meetings etc and various principles of company law which could in certain circumstances have an impact on the company (e.g. where a member was wanting to challenge a particular procedure or where a particular proposal in relation to changes to the articles could not be carried through because they would be inconsistent with Companies Acts provisions)
a company structure is more intimidating for those considering whether to join as members or put themselves forward for election to the board of directors
set-up costs can be higher than for a voluntary association or trust; and annual costs are higher, particularly if there is an external company secretary and/or if a formal audit is required.
How do we set up the Company?
The limited liability company is established through registration with the Registrar of Companies at Companies House. As part of the incorporation procedure two documents must be lodged with the Registrar of Companies, the memorandum of association and the articles of association, which is the company form of organisational constitution.
There is an initial incorporation fee payable to the Registrar and also an annual cost in being a company.
The memorandum of association specifies, often in great detail, what the company may do and what its objects are.
The articles of association are essentially the internal regulations of the company and regulate such matters as the convening and conduct of meetings and appointment and removal of directors.
Not everything has to be pinned down in these documents. It is always possible to set out some of the more detailed provisions (so long as they are not in conflict with what is set out in the articles) in the form of standing orders or policy statements. That is something which is quite commonly done in relation to matters such as detailed voting arrangements and conflict-of-interest rules. It should be recognised, though, that setting out provisions in documents which are separate from the main memorandum and articles may make them less accessible and/or may produce a rather confusing picture for someone trying to understand how the procedures are meant to operate.
The memorandum and articles can be changed at any time, providing the appropriate special resolution is passed at an AGM or EGM. It is quite possible, therefore, to start off a company with a very simple form of memorandum and articles, and then build in further material (eg. provision for a membership subscription or more detailed categories in relation to the people serving on the board), at a later stage. SCVO advises that that approach is preferable to spending weeks and months in the very early stages of a project in developing a very detailed framework for, say, elections to the board only to find out, further down the line, that in practice, many of the positions on the board earmarked for particular interest-groups cannot actually be filled. Time might be better spent in checking out the viability of the project and pursuing funding applications etc.
In practice, most steering groups consist of a relatively small number of people. From one point of view, the smaller the number of people involved in the drafting and adjustment of the memorandum and articles, the more quickly that process can be pursued. There is no legal requirement for any steering group to involve the wider community through inviting other people to join and/or by holding public meetings. SCVO advises that, from a practical point of view, if the organisation is intended to represent a particular community it would be advisable to establish the legitimacy (in an informal sense) of the organisation (and the people sitting on the initial board) by having some form of wider consultation at an appropriate stage (or stages). Having said that, there are many projects which are driven by a small number of committed people, and where no wider meeting is held until the first annual general meeting of the organisation. Even then, the number of members beyond those sitting on the board may be fairly small. As noted above, there is no legal obstacle to that.
The provisions of the Companies Acts are applicable throughout the UK. There are implications for the way accounts are presented and an Annual Return to Companies House must be made.
Memorandum and Articles of Association
These need to cover a number of issues, principally:
name - YouScotland
objects - The Memorandum of Association should set out clearly the main objects of the organisation. It is important that these are carefully drafted so as to reflect the aims which the organisation will be pursuing in practice. As a general principle the objects clause has two main aspects. It guides future boards of directors in relation to the range of activities which the company should pursue and it identifies for those dealing with the company what the company is set up to do. This could include people considering whether or not to join as members and, importantly, bodies which are considering whether to provide funding. SCVO advises that including certain terminology could improve the prospects of obtaining grant funding and/or other forms of support. They recommend looking at the constitutions of similar organizations. SCVO cautions that it is very important that the wording which is used in the Memorandum of Association does accurately reflect the aims and activities which the organisation will be pursuing in practice.
qualifications for membership - A company is effectively a two-tier structure, best understood by reference to the types of decision which can be taken at either Board or member level. Despite appearances, it is the members of a company - rather than the board - who have ultimate control, from the point of view of the legal structure. It is very important, therefore, that careful consideration is given to the question of who ought to be eligible for membership.
the members - who attend the annual general meeting (and any extraordinary general meeting) and have power to take certain fundamental decisions such as changing the name of the company, altering the objects clause, altering the articles of association or indeed adopting a complete new set of articles; issuing policy directions to the board (rare in practice); resolving to wind up the company. In addition, the members elect people to serve on the board
the board - who hold regular meetings during the period between annual general meetings, and generally control and supervise the activities of the company. In particular, the board is responsible for monitoring the financial position of the company.
composition of the board – The board’s role is to control and supervise the activities of the company. It will meet on a regular basis to receive reports (whether written or verbal), discuss important issues which have arisen, plan for the future and, importantly, monitor the financial position of the company. Some careful thought, therefore, should be given to the composition of the board.two tiers essentially although YouScotland is adding an Advisory Group into its structures.
conduct of business – general rules for the ways things will be done.
