There’s a lot to think about before formally setting up a sports club. Of course, your club is primarily about sport, however all new clubs require rules and a structure which are key to good management. Here our contractual and disputes specialist Tim Wolley, guides you through the legal framework options open to you.
The first steps
When setting up a sports club for the first time the main factors to be considered are:
- Income – The first question to ask is how will the club be financed. Will there be member’s subscriptions, grants, sponsorship or other forms of finance involved? Also, in certain situations it may be desirable to have charitable status.
- Responsibility – Who will run the club? How will it be managed? Will those responsible for running the club have responsibility for managing its funds and other assets? How will this work in practice? What does the responsibility entail? Are there safeguarding issues to consider?
- Liabilities – What are the risks? Will those responsible for running the club be held personally liable for injury, damage or losses to members or third parties caused by its activities? Do you need to reduce the risk of personal liability through choosing an incorporated vehicle and taking out appropriate insurance in respect of potential liabilities?
Possible Legal Structures
Legal documents you may need: Club constitution
This term is defined as a group that comes together for a particular purpose. The main advantages of being incorporated are relatively “light touch” regulation. For example, there is no requirement to send and file annual returns or accounts. An Unincorporated Association will typically have:
- A constitution which is the one legal document that sets out the rules governing their relationship and a broad membership which elects the management committee.
- Personal liability for the members of the management committee. As it does not have a legal identity in their own right, the members of the management committee enter into agreements and other obligations on behalf of the club and they are responsible for its debts and other liabilities. A member of the management committee may risk their personal assets if the assets of the club are not sufficient to cover all the debts and liabilities. This means that this form may not be appropriate if the club is likely to have significant uninsured liabilities, such as those arising from undertaking risky activities, employing staff or acquiring property.
- Limited company
- Community Interest Company (CIC)
- Co-operative and community benefit societies (registered societies)
- Limited Liability Partnership (LLP), and
- Charitable Incorporated Organisation (CIO)
If the club is incorporated, the club is a legal entity liable for its own obligations. This limits the personal liability of individual management committee members, shareholders or members.
To be an incorporated organisation offers the following benefits:
- As a separate legal entity in its own right, the club can enter into contracts, employ staff, lease property and will, at the same time, have the burden of those obligations and liabilities.
- ‘Limited liability’ incorporation limits the personal liability of the individuals involved (although it does not remove it altogether). This is particularly important if the social enterprise intends to employ staff, take on significant property interests or undertake major contractual obligations.
- Incorporation provides an established form of structure for stakeholder membership.
- With limited liability comes regulation and disclosure requirements which can increase public confidence in the club.
- Recognition by financial institutions. Banks and other financial institutions many insist on incorporation before providing loan finance.
Legal documents you may need: Incorporation documents including Memorandum and Articles of Association.
There are two types of limited company: those companies limited by shares (CLSs) and companies limited by guarantee (CLGs).
This is the standard form of company model used by business. It has a “share capital”, which is a nominal figure used to represent the total net assets of the company. Shares are issued to shareholders, who become the owners of the company. The shareholders’ potential liability is limited to the level of their investment.
CLGs do not have a share capital and the members (equivalent to the shareholders in a CLS) give a nominal guarantee to cover the company’s liability, normally limited to £1. CLGs do not have the in-built “for-profit” framework which CLSs do, allowing investors in a company to receive a return on their investment.
Some of the key characteristics of both CLS and CLG companies are:
- Power structure – companies have a two-tier power structure consisting of a small group of individuals responsible for the day-to-day running of the organisation (the board of directors) which is accountable to members (in a CLG) or shareholders (in a CLS), who may or may not be the same people as the board. The members or shareholders have a number of fundamental powers, in particular, the power to dismiss the board and to change the constitution.
- Constitution (Memorandum and Articles of Association) – the rules of the company are contained in the Articles, which set out the internal management structure and procedures, including roles of members and directors, procedures for appointment and removal and conduct of meetings. The Memorandum records the initial members on the company’s establishment. Standard forms of Articles of Association may be used, although it is often advisable to check with a legal expert to ensure that the constitution is appropriate to the organisation.
- Purposes – the “objects” clause sets out the company’s aims of purpose, which could be simply to carry on business as a “general commercial company” or, for a sports club, will be narrower and focused on a particular objective. For a charitable sports club, the objects must be exclusively charitable.
- Limited liability – the directors benefit from the protections of limited liability due to the company form, except in exceptional circumstances. An example of this is where a director has acted fraudulently or continued to run the club when it is insolvent (known as “wrongful trading”). It is possible to take out appropriate directors’ and officers’ liability insurance to cover such potential liabilities, but not in the event of fraud or other bad faith.
- Accountability – companies are required by law to make public certain information, such as annual return or financial accounts, which need to be filed with the Registrar of Companies (the regulator of companies established in the UK). Details of changes of directors and the company secretary, constitutional amendments and other disclosable matters also need to be filed.
- Registration – this is a straightforward process, requiring the completion of standard administrative forms and payment of a fee.
Community Interest Companies (CICs)
CICs can be registered at Companies House in the same way as normal companies, with the completion of an additional form setting out the community interest and how it will be pursued. They can be established as CLGs or CLSs. However, CICs have some particular features to safeguard the social mission, namely:
- A CIC has to carry out activities which fulfil a ‘community purpose’. This purpose will be defined on applying to set up the CIC, for example, the promotion of healthcare for the inhabitants of a particular area.
- A CIC also has a lock on its assets. This prevents profits from being distributed to its members or shareholders other than in certain limited circumstances (for example, a CIC which is a CLS provides the flexibility for shareholders to receive limited dividends).
- The CIC form allows for a lock on the company’s assets while allowing the board of directors to be paid. For this reason, it is an increasingly popular vehicle for social enterprises where the social entrepreneur establishing the organisation wishes to remain in control and receive a salary from it. CICs cannot be charities.
- CICs are regulated by the CIC Regulator, which is intended to be “light touch” (for example, compared with the often perceived “heavy” regulation of charities by the Charity Commission. A CIC is required to file a community interest report every year, which will include details of how it has pursued the community interest and involved stakeholders.
This legal structure tends to be used where it is appropriate to give a wide membership in equal stake in the organisation and an equal say in management and other affairs, for example, by co-operatives and credit unions.
Registered societies can take two forms: community benefit societies (CBSs) and co-operative societies (co-ops). The difference between the two is in the stakeholder groups that the society is set up to benefit: a co-op is set up to benefit its members, whereas a CBS is set up to benefit the community more widely (whether people are members or not).
The regulator of registered societies is the Financial Conduct Authority (FCA), which has a significant regulatory function. For example, registered societies need to file an annual return and audited accounts (if over the statutory threshold).
For their constitution, registered societies adopt a set of model rules registered by one of the recognised sponsoring bodies or a bespoke set within the FCA. In co-ops, it is mandatory for voting to be on a ‘one member, one vote’ basis. In CBCs, for this to be the case (although not necessarily). Any member can own up to £100,000 of the withdrawable share capital in a registered society, though in a charitable CBS the members usually only hold a nominal account. The constitution may allow for the registered society to issue “withdrawable shares”, which can be bought back or “redeemed” from members. This can provide a straightforward and cheap way to raise equity finance from its members, as withdrawable share capital is exempt from certain regulations applicable to conventional share issues (such as the publication of an appropriately drafted prospectus for potential investors).
Unlike companies, registered societies have the ability to merge through resolutions of their members into an existing or new society or company (known as “Transfer of Engagements”). This is a cheap and convenient process for a corporate change.
Currently, all charitable CBCs are exempt charities. This means that they are not recognised as charities by HM Revenue & Customs (HMRC) for tax purposes but are not currently required to register with the Charity Commission, nor are they directly regulated by it.
Limited Liability Partnerships (LLPs)
The LLP legal form retains the organisational flexibility of a traditional “partnership” and is taxed as such, but members have the benefit of limited liability. It has a single-tier structure (the LLP “members” are the equivalent of directors of a company).
The rights and duties of members have to be given by agreement between them (and the LLP). These are usually set out in a master written agreement (the “LLP Agreement”). However, in the absence of an LLP agreement, there are default provisions under the Limited Liability Partnerships Act 2000 (as amended). The LLP Agreement does not have to be filed with Companies House.
Many LLPs are used by two or more individual or corporate bodies to carry on a lawful business with a view to profit; however, clubs can adapt the LLP form to their needs, in particular, by having protections for the social mission set out in the LLP Agreement.
An LLP can be straightforwardly incorporated by filing an application form together with a registration fee to the Registrar of Companies.
Members are liable in the winding up of an LLP up to the amount they have agreed (which can be nothing).
The price of limited liability is disclosure; accounts must be prepared in accordance with the relevant accounting rules and filed at Companies House. They must disclose the highest paid member’s profits and the annual return must be completed.
Key features of charities
The key feature of a charitable organisation is that it is established with exclusively charitable objects, such as the advancement of education or the relief of poverty. Being a charity is a status; it is possible to establish a charity using a variety of legal forms, including a charitable trust, an unincorporated association, a CLG, an IPS and a CIO. The most common legal form increasingly is the CLG.
A large number of charities are not required, or are not able, to register with the Charity Commission and it is not necessary for an organisation to be registered in order to be a charity.
Other key features of charities are:
- Governance: the management committee of a charity (its charity trustees) are responsible for the charity’s administration and management, and are normally unpaid.
- Asset lock: a charity’s assets must always be used to further the charity’s purposes, and any profits or surpluses generated cannot be paid out to the trustees or members but have to be reinvested in the charity.
- Constitution: regardless of the legal form, the constitution will contain:
- a statement of its exclusively charitable objects;
- a list of the powers the trustees have in furthering the charity’s objects;
- a list of any benefits trustees are authorised to receive from the charity; and
- a “not-for-profit distribution clause”, requiring that all residual assets on dissolution are applied for charitable purposes (and not distributed to private interests).
- Public/private benefit: as public benefit organisations, charities have to be careful about not giving disproportionate levels of private benefit to any particular group or person.
- Tax relief: charities benefit from a number of tax advantages.
- Gift Aid: gifts to charities by companies and organisations which pay Corporation Tax are tax deductible as charges on income. Donations by individuals attract Gift Aid relief, which means that, provided the individual is a UK taxpayer, the charity can recover the amount of basic rate tax that the donor had paid on the amount of gift.
- Regulation: most charities in England and Wales are regulated by the Charity Commission. The Charity Commission is often viewed as a relatively “heavy” regulator and exercises considerable scrutiny over charities, particularly those turning over more than £250,000 per annum. Charities with an annual income of more than £10,000 have to file annual reports, accounts and an annual return.
- Trading: as an overarching principle of charity law, charities can only trade in the fulfilment of their primary purpose, that is, what the charity is set up to do. If the charity wishes to undertake further trading activities in order to raise money but which will not fulfil the charity’s primary purpose, unless the trading is minimal (that is, within the permitted statutory threshold, currently 25% of a charity’s total incoming resources, subject to a minimum allowance of £5,000 and overall cap of £50,000) and does not expose the charity to significant risk, the charity will have to set up a separate, for-profit trading company owned by the charity to undertake the activities. This arrangement is approved by the Charity Commission and HMRC. The rules around trading by charities or through their trading companies are complex and legal advice should be sought to ensure the trustees comply with the various rules and regulations.
Charitable incorporated organisations (CIOs)
The charitable incorporated organisation (CIO), has been designed specifically and exclusively for charities. The CIO combines the benefits of being a corporate body, with a separate legal identity and limited liability for its charity trustees and members, while being regulated solely by the Charity Commission and, unlike CLGs, not by Companies House as well.
Community Amateur Sports Club
Local amateur sports clubs have been able to register with HMRC as CASCs since April 2002. Registering as a CASC enables the club to benefit from a range of tax reliefs that are similar to those available to a charity, but not as extensive.
Registered CASC status is completely separate from a sport club’s legal structure. Provided its constitution meets the registration requirements, a club can adopt a number of different legal structures including an unincorporated association or a company limited by guarantee.
A registered CASC cannot be a charity
A registered CASC cannot be recognised as a charity for tax purposes. It is important that a club is clear from the outset about its motivations for seeking to register as a charity, as opposed to a CASC. While the tax benefits for charities are more generous than for CASCs, more restrictions are imposed on how a charity operates, including being subject to regulation by the Charity Commission. It is likely to be more costly to seek to register as a charity and to comply with the regulatory regime that applies to registered charities.
Also, if HMRC is satisfied that a club is entitled to be registered as a CASC, it must register it on receipt of the application. Should a club that has been registered as a charity make an application to be registered as a CASC and be accepted by HMRC, it will no longer be entitled to be a charity under the Charities Act 2011 (section 6).
Conditions for registration
To be a CASC a sports club must register with HMRC. A sports club is “entitled” to be registered as a CASC if it:
- Is, and it has a written constitution that requires it to be, a club that:
- is open to the whole community
- is organised on an amateur basis; and
- has as its main purpose the provision of facilities for, and the promotion of participation in, one or more eligible sports.
There are various strict conditions that must be met to satisfy the regulations but the tax benefits are considerable. In addition, Business rates reliefs and the Gift Aid Small Donations Scheme (GASDS) apply allowing CASC’s to claim for top-up payments under the Gift Aid Small Donations Scheme (GASDS) on small cash donations they receive of £20 or less without having to obtain a Gift Aid declaration or provide any other audit trail back to the donor’s tax record.
How we can help
- The team at Bowcock & Pursaill can help sports clubs with the drafting of constitutions, incorporation of companies, advice on charitable status and other matters raised above.
- Our lawyers are experienced in the legal issues that sports clubs are likely to encounter including employment matters, sponsorship and other agreements, lease and other property transactions and disputes.
- We can also offer fixed fee services in some instances to help budget for costs.
- We have offices in Hanley, Leek, Uttoxeter and Eccleshall and will travel to meet you and can attend evening meetings.
If you need further expert legal advice on any aspect of setting up a sports club please contact Tim Wolley on 01782 200007 or 07891 834081. Alternatively you can email him at firstname.lastname@example.org