Legal Briefs: In Good Company

Startup specialist firm Beauchamps Solicitors join us to answer startup legal queries.

This month, fundraising platform Likecharity needs some advice on the Companies Act 2014:

What effect does the Companies Act 2014 have on not-for-profits and businesses working with not-for-profits?

For third parties dealing with not-for-profit companies, there are minimal changes under the Companies Act 2014 (‘Act’). Obviously all companies must comply with the Act, but with regard to interacting with or doing business with not-for-profit companies, there are no additional specific obligations under the Act.

In relation to the obligations of not-for-profits: most not-for-profit companies are formed as companies limited by guarantee (CLGs) without a share capital.

The advantages of the company structure over other forms used by not-for-profits are as follows:

• incorporation affords the protection of limited liability to its members;
• incorporation facilitates contractual relations with third parties;
• assets can be held in the name of the company as opposed to the names of individuals;
• the company is a separate legal entity from its members and continues in existence despite changes to its membership;
• a company can bring and defend court proceedings in its own name;
• a company structure is more suitable for larger organisations and those which employ staff.

Under Part 18 of the Act, existing companies limited by guarantee without share capital were deemed to become CLGs from 1 June 2014. There is no need to re-register.

The Act was designed to simplify company law and to consolidate in one act all earlier pieces of company legislation. It contains a general set of standard rules which apply automatically to all private companies limited by shares (LTD). It then deals individually with other types of company and applies some, but not all of the same rules, depending on the type of company. In other words, some of the general rules are disapplied for certain types of company, including the CLG.

One provision of note is that LTD’s no longer have an objects clause. An objects clause sets out what a company can do. Under the Act LTD’s can now do anything a natural person can do (so long as it is legal!). This is not the case for CLG’s which continue to have an objects clause in their constitution. Any party dealing with a not-for-profit should ensure that the transaction is within the parameters of the not-for-profit’s constitution as a charity organisation, although the Act does provide some protection for third parties dealing with a company that acts outside the powers set out in its constitution.

The following are key changes under the Act which affect the CLG:

• Companies must now, instead of putting the word ‘limited’ or the abbreviation ‘Ltd’ at the end of its name, use the phrase ‘company limited by guarantee’ or the abbreviation ‘CLG’
• A guarantee company previously required at least seven members, it now requires only one. There is no upper limit to the number of members a CLG may have
• Two directors and a company secretary are required, as previously, (LTD only requires one director) and one of the directors can act as company secretary
• A CLG will continue to have a memorandum of association and articles of association contained in one document, which will be called its ‘constitution’.
• A CLG may avail of the audit exemption for small or dormant companies.

@BeauchampsSol

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NB: While all reasonable care has been taken in the preparation and completion of this article, no responsibility is accepted for any errors or omissions. This article has been prepared for information purposes only and does not constitute legal or other advice.

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