Member Article

Introduction A common question for clubs, events, and governing bodies at all levels of sport is what is the best legal structure to use - club or company? In this article we take a practical look at the pros and cons of the most likely options for your club or governing body. 1. Unincorporated Association A. What Is It? ● A group of individuals coming together to carry out a mutual activity, in common language a club. The group usually draws up a set of rules to regulate the relationship between the members and will usually provide for a committee to run the club’s affairs. An unincorporated association is the most common structure for sports clubs as it is the simplest and most informal way to establish an organisation. Put simply, any sports group or club which is not a company is an unincorporated association, whether its members are aware of it or not! B. Advantages: ● Informality: Comes into being simply as a result of a mutual decision on the part of its members to form a club. ● Simplicity: No need to file or publish accounts or returns. Legal formalities and administrative costs are kept to a minimum although it is a good idea to have at least some rules and regulations set out in writing. ● Privacy: The rules and accounts of unincorporated associations are not a matter of public record, allowing for privacy in the club’s affairs. C. Disadvantages: ● The club has no separate legal personality from members. (i) No limited liability. The members will be personally liable for any liability of the club not met by its assets. Therefore caution should be exercised in taking on any onerous debts. (ii) The unincorporated association will have to appoint trustees if it wishes to hold property such as a clubhouse. Similarly, if the club is to make a contract or be a party to litigation, a nominated member of the club must act on its behalf. However, as these activities are usually limited they are not too big of a drawback. D. Suitable For?: ● Grassroots clubs who do not hold any significant property or employ staff and whose liabilities can be easily covered by having in place appropriate insurance policies. Notable exceptions to this general rule include the IRFU and the English Lawn Tennis Association which are both unincorporated associations. However, nowadays most large sports clubs, events, or governing bodies are limited liability companies. 2. Guarantee Companies A. What Is It?: ● The liability of the members of a guarantee company is limited to the guarantee amount, usually a nominal sum. The guarantee company’s constitutional documents are its Memorandum and Articles of Association. It consists of members who normally elect a board of directors to conduct the affairs of the company and to whom the executives will report. It is possible to have either a public or private guarantee company. There are two key differences between public and private guarantee companies. Firstly, a public company limited by guarantee must have a minimum of 7 members with no upper limit on the number of members. In contrast, a private company limited by guarantee can have only a single member up to a maximum of 50 members. Secondly, a public company limited by guarantee is prohibited from having a share capital, while a private company limited by guarantee must have a share capital. ● A key characteristic is that a guarantee company may and generally will wish to generate a profit but it may not distribute that profit to its members. Profits are thus reinvested in the company/sport. B. Advantages: ● Limited Liability: The liability of the members is limited to the guarantee amount. ● Separate Legal Personality. This characteristic provides a club with the ability to hold property and bank accounts in its own right and the ability to sue and be sued in its own name rather than in the name of certain individuals. ● Flexibility: A company’s Memorandum and Articles of Association may be tailored to the purposes of the particular sports organisation. In particular a private company limited by guarantee may create different classes of shares in order to give different shareholders different rights. A Shareholders Agreement may also be put in place to further define the relationship between the members. C. Disadvantages: ● Regulated Environment: The Companies Acts prescribe various regulatory requirements which companies must comply with such as Companies Registration Office filings, meaning increased administrative burden and not insignificant cost compared to unincorporated associations. Cost may be an issue for small clubs and sports. Also failure to comply with these requirements will lead to probable prosecution and fines. ● Directors’ Duties: Where clubs or organisations are operated as companies they must appoint directors who are subject to onerous statutory duties and may be personally liable if the company fails to comply with the Companies Acts. D. Suitable For?: ● Larger clubs holding property and governing bodies, in instances where profits are not to be distributed. Examples include Kilmacud Crokes, Longford Town F.C., the FAI, the Irish Basketball Association and Páirc an Chrocaigh Teoranta, the company established by the GAA to manage Croke Park. 3. Limited Companies 3A Private Limited Company A. What Is It?: ● A private limited company with a share capital, a board of directors and members who hold shares in the company which may be transferred and which may carry particular rights e.g. voting rights. This is the typical basic private company that most people are familiar with. The private company limited by shares may have a maximum of 50 members. ● The company’s ‘rules’ are its Memorandum and Articles of Association which are filed in the Companies Registration Office. It may also have a set of rules to deal with the conduct of the organisation’s affairs which may go beyond matters normally covered by a company’s Articles of Association. This is allowed by company law but it is very important that the rules conform with the Articles, as at law the latter have primacy over the organisation’s rules. B. Advantages: ● Capital: A private limited company has the ability to raise finance by attracting investors through issuing shares and debentures. Shares may also be bought and sold. ● Limited Liability: As with guarantee companies. ● Separate Legal Personality: As with guarantee companies. ● Flexibility: As with guarantee companies. C. Disadvantages: ● Regulated Environment: As with guarantee companies. ● Directors’ Duties: As with guarantee companies. D. Suitable For?: ● Larger and more complex commercial and financial operations such as governing bodies and large clubs wishing to make a profit and possibly distribute that profit to its members. Examples include Shelbourne F.C. and European Rugby Cup. 3B Public Limited Company A. What Is It?: ● A company that offers its shares to the public. It must have a minimum of seven members but, unlike a private company limited by shares, it may extend its membership beyond 50. A PLC may offer its shares directly to the public or sell them through the Stock Exchange and float the company in this way. In Ireland, there are no sports clubs listed on the Stock Exchange. ● The PLC is in many ways very similar to the private company limited by shares, with principles such as limited liability and separate legal personality being equally applicable. On the other hand, the law and practice applicable to its formation, capitalisation, membership, corporate governance, transfer of shares, and accounting disclosure requirements is markedly different. ● A public company may be formed afresh or a private company may be converted to a public company where it wishes to increase its membership and/or raise additional capital. The formation of a PLC is typically a commercially motivated and expansionist move on the part of an organisation. B. Advantages: ● Flexibility: As well as having the ability to tailor its Memorandum and Articles to suit its purposes, a PLC may issue various types of shares with different qualities of membership rights attached. For example, voting rights can be restricted to a small number of specific shares in order to retain control of the club in a few hands. ● Separate Legal Personality. ● Limited Liability: Each member’s liability is restricted to the amount unpaid on his shareholding. ● Share Transfer: Shares in a PLC are in principle freely transferable, allowing a member of a golf club to sell his membership, perhaps even at a profit. This right is not absolute and may be subject to certain restrictions contained in the company’s Memorandum & Articles. The PLC can also be listed on the stock exchange. ● Capital: A PLC has the ability to raise finance by issuing shares and debentures. It has the added advantage of unlimited membership, allowing it even greater potential to raise capital. C. Disadvantages: ● Regulated Environment: PLCs are subject to an even more stringently regulated environment than the other two types of company. ● Directors’ Duties: The directors of a PLC are subject to the same onerous statutory duties as the directors of the other two types of company discussed. • Loss of Control: As the Glazers’ purchase of Manchester United illustrated, a significant disadvantage to a PLC offering its shares to the public is that it has no control over who purchases its shares or the intentions of its new owners. Despite the rancour of United’s fans the reality is that their club left itself open to this kind of takeover the day it became a PLC. D. Suitability: ● The PLC can be a suitable vehicle for clubs with a large membership which have a strong profit motivation and are intending to continue growing but require access to capital to do so. As the Irish sporting market is small, few clubs fall into this bracket. The exception is in the golf and country club market, in which several clubs have either converted to or incorporated as PLCs. As the number of members in a PLC may exceed 50, it is a particularly suitable vehicle for commercially run golf clubs, which typically have a membership of hundreds. Various classes of shares may be issued, allowing the club to market different classes of membership to the public. Examples include Carton House Golf Club, Castleknock Golf and Country Club and Glen of the Downs Golf Club. Conclusion Each of the above discussed structures has its merits, each has its drawbacks, and none will prove to be a panacea for all of the eventualities that may arise. Nevertheless, the organisation that objectively appraises its own peculiar circumstances and then chooses the structure that best fits those circumstances will have at least laid the foundation for a successful venture. If the sports club, event, or governing body decides to incorporate then it is very important that it keeps up to date with all of its company law obligations especially relating to its company filings. The corporate governance environment has changed substantially since the establishment of the Office of the Director of Corporate Enforcement in 2001 and there are substantial penalties for failure to meet the filing deadlines. It is also important that company directors in particular are aware of and comply with their statutory and fiduciary duties to the company.

 

Link to article