The first interview with people wanting to form a society is usually interesting, as there are issues to be discussed they have never thought of. Generally, I try to avoid getting into details immediately, as I think it is important to understand what may be required by exploring:
- What the organisation is doing and may do in the future,
- Whether the organisation will make commitments or incur risks that make an incorporated entity desirable to manage personal financial risks for members (especially the executive),
- How the entity is governed and managed, to ascertain whether a democratic entity is involved or whether a trust might be more suitable,
- How complex and extensive the entity’s operations may be, and
- What ideas and expectations the interviewees have.
What form of legal entity?
Whether an entity should be a society or trust depends largely on the extent of involvement of the “members” in its governance and choice of executive. If a democratic model is desired then a society is usually the best model, although a trust’s trustees may be selected by election.
The nature of the possible choices might best be illustrated by an example. If the formation of an entity to control a performing cultural group is being considered there are different options, including:
- If the group takes “all comers,” with all welcome, then the best governance model is likely to be a society, with a traditional form of membership, annual meetings of members, elections of the governing executive, and day-to-day governance (and, usually, management) handled by the elected executive.
- If members are graded in some way by abilities or training (such as many cultural groups, but also most sports clubs), a democratic society model allowing for the grading of membership or different membership classes may best suit.
- If the group is based very much on the abilities and mana of its cultural leader and with admission to performing membership being auditioned, the approach may be far less democratic. In such case a trust may well be the better model, but if the group is to operate commercially a company may be considered the appropriate option.
Article 3 in this series discussed whether or not an entity should incorporate, and my approach, essentially, is that if the entity will enter into legal commitments or might incur legal liabilities that members (especially executive members) would not want to have to meet themselves personally then the entity should incorporate. Incorporation also gives to those with whom the entity inter-acts some sense of permanence and credibility.
Charitable or not?
If an entity will have charitable purposes there are advantages in seeking recognition of its charitable status. The Pemsel categories of charity (Income Tax Special Purposes Commissioners v Pemsel  AC 531), now echoed in the Charities Act 2005, are advancement of religion, advancement of education, relief of the poor, and other purposes beneficial to the community. Each category has constraints of varying degrees of difficulty, and the practitioner advising on whether an entity may be regarded as being charitable needs to be familiar with occasionally complex and, even, esoteric principles.
Most societies will be registered under the Incorporated Societies Act 1908. However, if a society is charitable then registration under the Charitable Trusts Act 1957 may be considered, and a charitable trust cannot be registered other than under the Charitable Trusts Act. Registration under this Act has some advantages; no filing fees and no annual return being the obvious ones, but the perceptual benefits of being registered as a charity under this Act may also be considered to be a benefit.
If a company model is more appropriate, the entity (including a charitable organisation) may be registered under the Companies Act 1993. For completeness, it should be noted that there are specific statutes under which industrial unions, credit unions, friendly societies, and agricultural and pastoral societies may be registered.
If the entity is charitable, then registration with the Charities Commission under the Charities Act is highly desirable. A registered charity under that Act is required to file its accounts annually with the Commission and is subject to Commission monitoring and investigation. However, a major reason for Charities Commission registration is that the entity is seen as being publically accountable and can be regarded as credible.
Having worked through the maze of options to be considered, the interview then gets on to what the people who came to see you really thought was the object of the appointment; the constitution. Most practitioners regularly advising on societies and trusts will have developed their own standard template rules and deeds. I find it far more time-consuming (and, therefore, more expensive) to draft a constitution if I have to work on a draft produced by the clients or to revise an existing constitution.
A badly drafted constitution will cause dreadful (and potentially expensive) problems if issues arise about governance or management. Some of the problems I’ve encountered include:
- Constitutions that are internally inconsistent, with conflicting provisions,
- Adoption of a constitution for a branch which was actually the same as the constitution of the parent body (totally disenfranchising the local members),
- Constitutions laden with detail that require frequent amendment, when such issues could be removed into bylaws, regulations, or policy documents,
- Constitutions that were drafted decades ago which are effectively ignored because they no longer answer to current needs and practices, and
- Constitutions that have not kept pace with changes in society (for instance, requiring notice of meetings to be published in newspapers that many members no longer subscribe to, requiring communications to be mailed when faxes and email are now so commonly used, and meetings and voting having to be conducted face-to-face when teleconference and postal or electronic ballots can be used).
My advice: Even if it costs to get a lawyer to prepare the constitution, in the short-term it will save members a lot of time, and in the longer term it should save much wasted time, angst, and money.