Limited Liability
Many sports clubs are non profit making members clubs, ruled by a constitution, but having no legal existence and being unable to enter into contracts unless in the name of its officers or trustees, i.e. they are unincorporated associations. The main weakness of unincorporated associations is Personal Liability. Insolvencies of clubs have shown that officials may (as a last resort) be sued for club debts and theoretically all members may be liable. In one case creditors took individual members to court and they were means tested as to their ability to pay. Clubs should consider whether the unincorporated member’s sports club is the most appropriate organisation to manage the current game.
There are a number of alternative to an unincorporated body and the main attraction is the reduction in personal liability of members by enabling a club to exist as a separate entity and enter into contracts in its own right. The following are the main alternatives:-
1. Limited Companies
The great majority of businesses are run through limited companies and there are two types.
1. Limited by Guarantee
Members of the company do not hold shares but guarantee, in the event of a winding up, to contribute a sum of money, normally £1. Such companies are non profit making and the rules and regulations of the company allow one member one vote in general meetings. In the event of a winding up, surplus funds must be transferred to similar charitable organisations and no funds are distributed to the members.
1. Limited by Shares
Members of the company hold shares and can receive dividends on those shares. The shares can be transferred to other members. The principal aim of companies limited by shares is to make a profit and they are taxes accordingly. The rules and regulations of the company give the shareholders voting rights in relation to the number of shares they hold. Shareholders with more than 50% of the shares therefore control the company.
1. Cooperative and Community Benefit Societies
Most social clubs are registered under the Cooperative and Community Benefit Societies Act and are known as Registered Societies. The Act was originally to govern co-operative societies whose business was intended to be conducted for the good of the community and were non profit making. Members purchase one share and in general meetings the rules allow one member one vote. In the event of winding up, the funds are distributed amongst the members.
In companies limited by shares, the company is run by directors, but guarantee companies and Registered Societies are run by an elected Committee.
Of the three types of organisations above, the ones best suited for non profit making bodies such as sports clubs seeking to limit the liability of members are the company limited by guarantee and Registered Society.
Our experience as auditor of a large number of social clubs and rugby clubs leads us to believe that a Registered Society is well suited in situations where the sports club also has a social side and runs a bar and has entertainment income etc. In the case of rugby clubs, the RFU has sponsored a model set of rules for English rugby clubs wishing to register under the Cooperative and Community Benefit Societies Act, thus making the registration process easier. Once a club is registered, the assets and liabilities of the old club automatically become those of the registered club, thus saving on legal fees etc.
One further point to consider, especially in the case of rugby clubs, is the possibility of making the playing section of the club a legally separate organisation from the social side. The social side of the club could own the club premises and receive the bar and related income and expenditure etc and the playing section would receive the playing income and pay the playing expenses. There are normally separate committees for the social and playing sections and therefore the separation of the club into two in this way should not be too difficult.
Each club is different and the solution to the problem of limited liability of the members will vary according to circumstances and perhaps the need to consider taxation implications. However, some thought should be given by all unincorporated associations as to the potential liabilities they may be exposed to and to take action accordingly. If incorporation is not a preferred route then the club insurance policy should be reviewed