In this month’s P4P blog, Kirsty Noble from Senscot Legal discusses the legal implications of forming a partnership between two or more organisations. This includes making decisions on how your partnership is governed, and whether or not to form a new legal entity.
An introduction to partnerships and collaboration
Put simply, ‘collaboration’ just means two or more organisations working in partnership. Organisations can work together in a number of ways, from joint delivery of projects, through to funding and delivering contracts. Collaborative working can be for a fixed time or on a more permanent basis.
You may identify a funding or tender opportunity that interests you, but which you know you cannot deliver because of the size or scale of activity involved, or a specialism required. It could even be a mandatory requirement of the funding or contract opportunity.
One driver behind partnership development is that it allows for greater economies of scale, efficiency and effectiveness. Other benefits could include a wider geographical reach of your services and/or products, sharing risk, an ability to network or learn from each other, and it can give you a stronger, united voice when approaching funders or commissioners.
Partnerships can be composed of organisations from a variety of sectors. For example, they can combine social enterprises with other types of third sector organisation, such as charities, voluntary organisations or involve a mixture of public, private, social enterprises and voluntary organisations.
Effective partnerships can also take time to develop. This means that before taking any practical steps to develop a partnership for a tender, or extending your operations to working closely with others, there are some key considerations about your own organisation on which you should be clear:
- Do you have a long-term vision for the organisation?
- Are you ready to share information with partner organisations in an open and honest manner?
- Do you have a good understanding of what collaboration involves, including the practical steps, obstacles and challenges, operating models and governance, development process and funding?
Forming a partnership or consortium for the purpose of entering into a project to deliver public services or extend your operations is in many respects like developing any other business relationship and will require proper evaluation.
You should learn as much as possible about collaboration might involve and the practical steps to build a partnership or consortium. P4P has developed the Collaboration Toolkit which can be used as a quick ‘go to’ guide on collaboration and to track your progress. It has been prepared with three phases that follow the typical lifecycle of a collaborative project.
When working in partnership it is important to establish whether the arrangement will be governed by a contractual agreement or whether you will take the more formal step to incorporate the partnership as an entity in its own right.
You should first identify whether it would be desirable to form a separate entity through which the project would be run, as opposed to relying upon contractual rights derived from a partnership agreement. If the decision is taken to establish a separate body as the vehicle for the project delivery, the type of legal entity should be carefully considered. As with any new set up the legal entity to be established will depend upon whether the consortium is to be profit-distributing or non-profit distributing.
The decision as to which model to adopt will depend upon a number of considerations. For example, if the project is intended to be of a long-term nature, there may be a need for flexibility in responding to new developments and market opportunities as they arise, and that would tend to point to use of a corporate body.
The most straightforward way to govern the arrangement is to prepare a Partnership Agreement or Memorandum of Understanding (MoU). An MoU is a non legally-binding document which can be a useful starting point for any partnership before the decision is made to formally incorporate at a later point. The MoU should contain all pertinent information that relates to the project. It is normal practice to prepare an MoU when first entering into a partnership. This will help you identify roles and responsibilities without you unnecessarily entering into a new legal structure.
An MoU or Partnership Agreement can be a useful tool for creating the conditions for effective collaboration, outlining how the partnership will work. The agreement is essentially a statement of intent, agreed in good faith by those who sign it on the basis that it is a fair and honest representation of their intentions.
An MoU will often form the basis of a more formal partnership. The MoU is not intended to be legally binding and it need not have legally enforceable provisions. A Partnership Agreement is more formal and has legally binding and enforceable clauses, which may for example commit the parties to the partnership for a certain duration, or financial responsibilities both during and at the end of the partnership. It sets out the members of the partnership, its purpose, and what has been agreed by the parties about how the collaboration works, such as the rules under which it operates.
Written agreements provide clarity, help to define the relationship between the parties and manage conflict. It is important to state what your objectives are, each party’s roles and responsibilities, and what will happen when the partnership ends.
P4P can support you to prepare a tailored Memorandum of Understanding. You can contact the team here.
If the decision is taken to incorporate a separate entity for the delivery of a project, then the parties must decide whether it is to be a profit-making vehicle or if it is to be an asset-locked entity which could attract grant funding. An asset-locked organisation is one which does not distribute profits to those that are running it, but instead re-invests any surplus to develop the organisation and to advance its community or social purposes.
Where the intention is for the partnership to be profit-making, the choice will be between a company limited by shares, CIC limited by shares, and an LLP. Where the intention is for the vehicle to be asset-locked, a company limited by guarantee, a CIC limited by guarantee or a charity will be the appropriate legal entity.
The options for incorporation would be:
Company Limited by Guarantee
This is a limited company, registered with Companies House, which has no shareholders and therefore no mechanism for distribution of dividends. It is for this reason often used by social enterprises and other not-for-profit organisations
A charitable organisation is one which is registered with the Office of the Scottish Charity Regulator (OSCR) and has aims and objectives which all further a charitable purpose, as well as a permanent asset lock. The incorporated charitable forms are a charitable company limited by guarantee or a Scottish Charitable Incorporated Organisation (SCIO).
Company Limited by Shares
This is the traditional type of legal entity used in the private sector and is often a good option for any organisation which plans to distribute profits amongst its members or directors.
Community Interest Company
This is a type of company which is established for community benefit and has a permanent asset lock. The underlying legal structure may be a company limited by guarantee or a company limited by shares, with the community interest status added as an additional layer.
Limited Liability Partnership
This is a profit-sharing vehicle registered with Companies House but with no shares or shareholders. The partners can be individuals or organisations. The partnership does not pay corporation tax; instead each partner is taxed through self-assessment as a self-employed individual.
The partners would each become members of the particular entity and would be governed by Companies House (apart from the SCIO structure which is governed only by OSCR). Each structure requires a board who should take responsibility for the governance and financial operation. The tax consequences should be taken into consideration for each of the entities and further advice on this should be sought from a qualified tax advisor.
The key point to remember when establishing any partnership is to have a clearly defined plan of what you want to achieve through the partnership. The appropriate contractual framework or legal structure to deliver the project will follow on from this.
About Senscot Legal
Senscot Legal provides high quality, affordable legal advice and support to third sector organisations. It was established in late 2010 to provide legal support to social enterprises and the wider third sector in Scotland.
Areas of expertise include: Governance, Legal Structures, Charity Law, HR/Employment Law, Intellectual Property Law, Contract Law, Leases, and Dispute Resolution.
Fees are charged on a reasonable and affordable basis and as far as possible Senscot Legal uses fixed fees for clients’ peace of mind. An initial consultation is offered free of charge.