If you are a charity trustee or a committee member of a not-for-profit organisation then you may be at risk of unexpected liabilities. A recent article in the Dunfermline Press reported that the local branch of the Royal British Legion owed over £91,000 in unpaid tax to HMRC and the branch secretary had been served personally with the claim. As such, she was facing potential bankruptcy in respect of the debt.
This case is a stark (and often ignored) reminder of the risks of operating an organisation as an “unincorporated association”. This type of organisation is usually easy to set up through agreement and does not require to be registered. However, there are two major legal disadvantages:
- The lack of separate legal identity. This means that the organisation cannot enter contracts, sue/be sued or hold assets in its own name. As a consequence, legal obligations are usually entered into by the charity trustees or management committee members personally on behalf of the organisation.
- Charity Trustees and committee members can be held personally liable for any debts and contractual obligations of the organisation (as was the case with the Dunfermline branch of the British Legion).
Organisations which are typically run as unincorporated associations are often voluntary bodies such as church groups, sports clubs, youth clubs, support groups and student associations. However, the level of risk taken on by charity trustees and committee members is completely at odds with the fact that they are giving their time for free in order to benefit others as there is no commercial trade-off or justification for individuals assuming this level of risk.
So what can charities and non-for-profit organisations be doing to minimise the risk of personal liability for its charity trustees and committee members? They should consider converting the organisation into an alternative legal form such as a:
- Company limited by guarantee.
- Scottish Charitable Incorporated Organisation (SCIO): as the name suggests this is restricted to organisations that pass the “charity test”.
Both these legal vehicles have a separate legal personality so can enter into contracts in their own name (rather than that of the charity trustees and committee members personally) and the liability of members is limited. As such, this addresses the main disadvantages and risks of the unincorporated association.
If you are a committee member of an unincorporated organisation or charity trustee and would like to discuss ways of restructuring to minimise the risk of personal liability then please contact Angus McGuire or Alan Stalker on 01383 721621.
Angus McGuire: firstname.lastname@example.org
Alan Stalker: email@example.com