Why incorporation matters

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Incorporation means creating a legal identity for an organisation that is separate from its members. Incorporation helps to protect individual members from being personally liable for the risks of the group, but incorporation places new responsibilities on the organisation.

This section looks at the difference between incorporated and unincorporated organisations, and factors to help you decide whether your organisation should incorporate.

Many community groups are unincorporated for example local sports clubs.  They may have few responsibilities so the risks to the members is low.

Unincorporated charities and non profit organisations

• An unincorporated association is simply a group operating under a common name without a legal structure. In an unincorporated organisation the law does not distinguish between the organisation and its members. 
• Members of an unincorporated organisation have unlimited liability and this is usually joint and several (that is, all members are expected to meet any debts, with the burden falling most heavily on those most able to pay).
• Unincorporated organisations cannot enter into contracts themselves. One of the members must do so and accept any risks that go with it. If you are employing staff and taking on contracts you should consider whether the organisation should incorporate.

Incorporated charities and non profit organisations

Incorporation means creating a legal identity for an organisation that is separate from its members, once incorporated the organisation becomes ‘a corporate body’.

• An incorporated organisation is a legal entity in its own right. This means that the corporate body itself agrees contracts, employs staff, leases property and takes on obligations and liabilities.
• Incorporation limits personal liability although individuals retain some liabilities, for example, for dishonesty or neglect.
• The main disadvantages of incorporation are the extra administration and costs involved, and loss of flexibility.  Incorporated organisations have to register, complete annual returns and file accounts, etc. It is an offence not to do so. In contrast, unregulated organisations have greater freedom of operation, although they must operate within the general law.
• To incorporate you must choose a legal form - for example to become a company limited by guarantee, a Community Interest Company, an Industrial and Provident society or a Charitable Incorporated organsiation. You can read more about these legal forms in our glossary.
• Charities who are also companies face dual regulation from the Charity Commission and Companies House. (The soon to be introduced Charitable Incorporated Organisation will be regulated solely by the Charity Commission)

Useful links

• This case study explains how trustees of one unincorporated charity, St Luke's Hospital for the Clergy, lent £600,000, and faced personal liability for debts of 3.2 million. 
• Governance and organisational structures (pdf 576kb) is a useful guide to understanding different legal forms and organisational types in England.

Have your say

Share your knowledge and experiences around incorporation and ask questions on the Governance forum.