The Wharton Club of the United Kingdom

Report from the Project Group on Structure of the Club 27 April 2018

1. Background

During the process of recruiting the next club officers, some concerns were expressed that the unincorporated nature of the Club could potentially expose the officers to law suits and/or financial loss, as the officers are liable for the Club’s actions. After a Club-wide debate at a special meeting on 15 March 2018, it was agreed that possible legal structures for the Wharton Club of the United Kingdom should be explored and the pros and cons of possibly changing the Club’s structure be evaluated. A project group was therefore set up to take on this task and report back to the officers of the Wharton Club of the UK.

The project group took expert advice from a lawyer experienced in this area and also undertook on- line research on trends in club structure.

2. Findings

There are three main structures the Wharton Club could follow: charity, unincorporated and incorporated. The task force looked at each of these.

  1. Charity: to qualify as a charity, the club must adhere to strict regulation under the Charities Act, and the Charity Commission must rule that its mission is a charitable one, a qualification which is increasingly subject to close scrutiny. Although profits generated by the Club are minimal (dues, events etc), as a charity, the club would still be subject to regulation by the Charity Commission. This would impose a heavy regulatory burden on the Club, and it is also unlikely that the Club would satisfy the requirement that profits were disbursed for third party welfare. The project group therefore eliminated this option.
  2. Unincorporated: this is the simplest and most basic form of club structure. It is commonly used for volunteer clubs that have few or no assets. Directors are elected by members and take decisions on behalf of the club in accordance with the club’s constitution and articles of association. As the elected/appointed/volunteer officers act on behalf of the club, they are also liable for any actions of the club. This is the current status of the Club.
  3. Incorporated: this structure is often used by clubs that conduct physical activities (due to the liability risk) and/or have material assets. The club has a separate legal identify from the club officers and thus provides an arm’s length relationship between members (and officers) and the club. Assets are held by the club, and the members therefore have limited liability for the club’s actions. This structure is becoming increasingly common for clubs that have regular activities and/or have material assets.

There are two types of incorporated clubs:

  1. Limited by guarantee, and
  2. Limited by Issued Share Capital.

As the titles imply, officers’ and members’ liability is limited to the amount of Capital delineated in the club’s Articles of Association. Issued Share Capital defines the amount members have put into the club, which is currently not applicable in the case of the Wharton Club (and would require keeping a shareholders’ register). The working group felt this would be onerous, and have therefore eliminated this option.

Limited by Guarantee means that members’ liability is limited to the amount set out in the Articles of Association – this could be £100 or £1, according to the club’s wishes. Individual liability is therefore de minimus.

From the project team’s research, it appears that many clubs are following this route of Limited by Guarantee, particularly in cases where events are organised by the club. Examples are golf clubs, sports clubs and the Penn Club itself. The Univesity is recommending that its affiliated alumni clubs move to some form of incorporated structure over time. There is always a risk of liability in event organisation, and this structure by definition limits members’ risk.

Summary of the Structures

 

Unincorporated

Incorporated limited by guarantee

Simple club structure. Officers appointed or elected and take decisions on behalf of the club.

Simple structure but the club has separate legal identify from the officers of the club.

Officers and the club have no legal entity but are protected by directors’ insurance (provided policy requirements are monitored and enforced).

Club has a separate legal identity from officers, so directors’ liability is limited to amount set out in the constitution.

Few on-going costs other than bank charges.

Need to file annual accounts and bank reconciliations. One-off legal fees will be incurred at incorporation.

Existing club constitution and articles of association do not need to be streamlined or edited.

Club constitution and articles of association will need to be reviewed and slightly adapted to incorporated structure.

Elected officers have substantial control over current bank assets, now more than £60,000 but are subject to unlimited personal liability.

Assets are held by the club so that any liability is limited to the club’s assets, not members’ or Officers’ personal situations. Club funds are subject to a clear audit trail in terms of disbursements. Given the removal of direct Officer liability, the Committee may choose to increase checks and balances over disbursements

Club needs to be able to demonstrate it is dormant to maintain its tax status

Club needs to demonstrate its dormant tax status, or will be liable to annual HMRC filings and corporate tax

Structure has served the club well for many years.

Many clubs, including the Penn Club, are now converting to incorporated status to limit directors’ liability.

Limited number of volunteers now willing to act as officers without limited liability.

Pool of future club officers potentially greater given protection of legal entity.

No Company House filings; assuming status is accepted as dormant, HMRC filings every 5 years – otherwise annual

Annual Company House filings, as well as notification when directors of the Club change; assuming corporate status is accepted as dormant, HMRC filings every 5 years – otherwise annual

 

3. Recommendations

It is evident that the success of the Wharton Club has meant the Club has built up material cash assets and runs an active roster of events. This exposes the officers to potential liability as they act on behalf of the Club and can be sued. Although the Club has directors’ liability insurance, it is difficult to monitor compliance with the terms of the Club’s policy as the Club is handed over to different officers on a frequent basis. The project team therefore recommends that Club incorporates under the Limited by Guarantee structure.

Incorporation will incur a one-off legal fee to set up the structure, as well as an annual fee to file Club accounts by an accountant. The project team explored quotes on the legal fee, which would be approximately £2,000. The on-going cost of filing accounts would be approximately £500.

  1. Required actions

The Club’s officers will need to consider this report and decide on the Club’s structure and whether to put this to a members’ vote.

Regardless of the decision ultimately made vis a vis the Club’s status, it will be necessary for the Club to register with HMRC. This should have been done in the past but was not. It is highly likely that the Club will be considered “dormant” for income tax purposes and will therefore not have to file again with HMRC for 5 years. The Club will need to show that transactions occurred between club members only, that the list of members is kept up to date, and that any transactions with non- members are not profitable.

To turn itself into a Company limited by guarantee, the Club will need to do the following:

    1. Revise its Articles of Association to incorporate. There are standard Articles of Association into which the Club’s current Constitution and by-laws could be amalgamated. This would incur a small one-off cost.
    2. The Club would need to prepare annual accounts to be filed with Company’s House which would require some administrative work as well as the cost estimated above.
    3. Similarly, if the Club expects to be profitable and wants to minimise tax, it must show that that transactions occurred between club members only, a list of whom is constantly up to date, and any transactions with non-members are not profitable. The club should weigh up the administrative burden of such tracking vs the tax saved. The project team did not explore this.