Should a club be a limited company?

   The first question to ask is whether an unincorporated motor sporting club would benefit, if it formed and carried on its business as a limited liability company.  It all depends!  It certainly does aid other people and organisations to know with whom they are dealing because information about the Company and its officers has to be filed regularly with the Registrar of Companies in addition to a copy of its annual accounts.  All this information about the Club (which has now taken on a separate and independent identity of its own) becomes part of the public domain.

   So there is a theoretical benefit to outsiders but what about perceived benefits for club members?  Firstly, the choice of legal framework affects the liability of the club and its members differently depending on whether it is incorporated or not.  Put simply, in the event of an unincorporated club ceasing its activities, whether voluntarily or involuntarily, the officers of that club are usually responsible personally for any liabilities of the club should its assets prove insufficient to discharge its debts in full.  The officers in this context usually embrace those club members elected to sit on the main or controlling committee viz., chairman, club secretary, competition secretary, treasurer etc.

   On the other hand, members of the limited liability company are, in normal circumstances, only liable to the extent of their investment.  The form of company, which is adopted widely as most suitable for sporting clubs, is that of Limited by Guarantee.  Such a company does not have shareholders but each member guarantees that in the event of the company being wound up and being proved insolvent, he or she will pay (usually a nominal £l) if called upon to do so.  Conversely, company's Limited by Guarantee don't usually distribute profits to their members.  Such details are embedded in the constitution and terms of reference which in company terminology is known as the Memorandum and Articles.

   One issue seems to confuse most of us.  The relationship between members and directors.  The company's members (shareholders, club members, guarantors) are its controlling influence, i.e. they have the vote.  The directors, although of a much higher profile, are subservient to the members who employ/elect them to run the day to day activities of the organisation.  However the rub is that under company law it is the directors who are normally called to book if things go wrong.  The directors in our limited company for instance would probably be the self same elected officers of the unincorporated club mentioned above.  It is also important for budding directors to note the current statutory position is that directors of a company may be personally liable for its debts if they have allowed the Company to trade and incur those debts whilst knowing it was insolvent.

   So to avoid such insolvent trading incorporate and you will have "ringed fenced" the club members by limiting their exposure to a £1 each.  But, as we know, life is not so clear cut.  What if the Company, although breaking even on its trading has no assets to speak of?  Who in their right mind would give unsecured credit?  Certainly not everybody and particularly not bankers.  Those most prudent amongst us often look for other ways of underwriting the transaction when dealing with "companies of straw", often in the form of a personal guarantee.  Which usually means in practical terms the directors putting their personal goods and chattels up as collateral security.  Which brings us back to where we started!

   Obviously the best way to protect the club's funds and the personal wealth of its officers, is to manage the financial risk from the outset.

   If we analyse the typical motor club's exposure to risk we may well find they fall into two distinct categories.  Those risks arising from normal trading with club members and others which if carefully managed should minimise the exposure and, secondly, those outside your control usually involving some catastrophic happening.  It is the latter unplanned event which could bring a club to its knees.  But help is at hand.  Enter the insurance broker.  He has at his finger tips insurance's to meet all contingencies of club life.  Remember however, that the MSA has already covered its recognised clubs and officials against third party claims made against them arising from an accident at an event (easily the single most probable source of a crippling claim).  However, as any glance through the newspapers shows, people seem ever more ready to sue on the slightest pretext and a 'happening', not on an event - perhaps an accident during high jinx at a dinner dance or a serious libel in your club magazine - could be just as financially disastrous.

   Ensure that your club and its officials are fully protected by public liability insurance for your regular meetings and social activities.  The MSA insurance brokers, Alexander Forbes, will be able to provide you with a quotation and cover appropriate to your clubs activities.

   On balance a club has to weigh up the protection given by the limited liability company with the disadvantage, inconvenience and expense of servicing the company.  For whereas the initial formation charges are of a modest amount and with professional fees would not generally be of an unbearable cost for a club, the administration, annual cost of filing returns, the audit and other statutory requirements does generate an increased clerical burden with the possibilities of fines for non compliance.

   If you are intent on forming your club into a limited company, take advice from a solicitor specialising in such matters and in the meantime be careful, vigilant and business like in your dealings to protect your club and its officials.