Our playgroup existed as an unincorporated association like most community playgroups and other community oriented, non-profit organisations do. Essentially, like-minded people get together and adopt a constitution and typically join PATA (playgroup association) that provides model constitutions and other advice.  The problem with this is that it is like a legal partnership in so far as the members of the committee are jointly and severally liable for the debts of the group should any arise. This understandably makes it difficult to recruit trustees because they could lose a lot of money through the actions of another less scrupulous trustee or indeed plain old bad luck.

One solution to this is to become a limited company.  Most commercial companies are limited companies for this reason. The company becomes a legal entity and so long as the debts of the company are not personally guaranteed the directors are responsible only in the event of misconduct. The company can get into financial difficulties and the directors can survive another day. It’s not quite as simple as this. But essentially, if you follow the rules and are honest in all matters then you are very well protected from the worst that can go wrong.

Commercial companies have shareholders. Shareholders expect to get a share of the profits through dividends or to obtain a capital gain when they sell their shares at some point in the company’s lifetime. But a charitable institution such as a community playgroup isn’t there to make money for “shareholders”. There is a specific type of company for this purpose called a company limited by guarantee.

Ridgeway Playgroup Ltd is a company limited by guarantee. This means that each “member” (the non-profit equivalent of a shareholder) guarantees to meet a certain amount of company’s debt in the event that it becomes insolvent. This can be as little as one pound (£1). I know, it seems pointless but those are the rules. You need a memorandum (an agreement to form a company by the founder members) and some articles of association (describing broadly the business you will carry on and how certain decisions will be made). The charities commission has sample documents for this purpose and they can accept some limited amendments without causing you to be refused charitable status. What we did with Ridgeway was to get those documents from the charities commission, modify them very slightly (they are based on good sense after all) and then use these along with a registration form from companies house to register the company. Doing it this way costs only your time and the registration fee which I think was just £20 from companies house.

You could go to a company registration agent and they will do this same day for £40 to £90 but personally, I didn’t like the off-the-shelf nature. I wanted to know that the memorandum and articles were of a form acceptable to the charities commission and I also wanted to make sure I knew as a director of the new company exactly how it was set up. You do have important responsibilities as a director and it’s best to know exactly what they are and read all the guidance freely available from companies house.

If you are moving an existing playgroup to a company status then my suggestion would be to register the company under a suitable (new) name first. Pay the modest fees and postage etc. out of your own pocket and keep the receipts, you will claim those back from the company later. Then, once you have the company setup, register it as a charity with the charities commission. Time passes (charity registration can be 80 days!!) so after maybe 3 months you now have a company which is also a charity and you have a company registration number and a charity registration number.

Now, before you go any further, write to the inland revenue and inform them that the company is a charity for tax purposes. Also inform them that your directors are unpaid. We missed this bit early on and the first we heard was when the director’s tax codes were reduced significantly. When we enquired, HMRC informed us that as we were directors of a new business and they had not had any PAYE info etc then they had assumed we were being paid £6k a year as a second income and were taxing us accordingly. It wasn’t a problem and when we put them right they corrected the tax codes and nothing was lost by anyone but it came as a shock and is a surprise best avoided.

Would be wise now to go get a bank account. You will need the company registration certificate and there are fees coming up so you could do with say £100 to open the account. As the company is now a charity you should be able, with the agreement of the current playgroups committee to donate £100 from the playgroup to the new company.

Now, you need to speak to Ofsted. As directors/trustees of a playgroup you will need CRB certificates just like the staff do. You may not have needed these before. Get them sorted and give OfSTED whatever they ask for explaining that you’d really like your current registration to be transferred to the new company. Eventually, they will give you a date when registration will be effective from. Set this date for starting to employ your staff through the new company.

However you do your payroll now you should be able to transfer without upheaval. Before then though, you need to get your cash reserves from the old group to the new. YOU MUST BE WHITER THAN WHITE here! don’t try to take shortcuts. If you are affiliated to PATA then the constitution will require you to seek PATA’s approval in order to shutfown the old group, essentially this is what you are doing. Ask for the permission. As you are transferring the funds to another charity who’s objectives are the same, they should not refuse. When we did this, PATA were so ignorant of the requirement that the only trouble we had was convincing them that they DID need to approve it in writing!

EVEN THOUGH COMPANIES HOUSE, CHARITIES COMMISSION, PATA ETC ALL HAVE EMAIL, I WOULDN’T BOTHER. They are all essentially incompetent at managing processes by email. Make formal letters, print them, send them recorded delivery. Don’t take any chances. Effective people within these agencies are, in my experience few and far between (because of their management structures or lack of training rather than the individuals themselves but the result is the same) so keep everything simple and record everything. If you have a phone call, get the date, time, name and department of the person you spoke to and confirm the outcome in writing by post. It’s crap but get used to it, you cannot trust them to do what their representative said they would do on the phone. We lost 3 months with ofsted because of this type of incompetence.

Once you get the ofsted registration sorted and your payroll and funds are transferred you are operating as the new company. You will have to wait until the accounts of the old one can be closed before formally closing the old group. Don’t forget to keep parents and staff fully informed throughout this process. This is to the advantage of them all and you need to make sure they understand that.

As an existing group you will have had staff that may have been with you some time and may have built up entitlement to redundancy payments. Essentially, you have to make them redundant from the old group and employ them in the new. However, THIS IS NOT AN OPPORTUNITY TO DISADVANTAGE THEM. It’s an opportunity to demonstrate to your staff that you realise the group is nothing without them. Construct a letter that gives them “Confirmation of period of continual employment”. The letter should state simply that a) their employment is being transferred to the new company (they need a new contract of employment) but that this does NOT result in redundancy and b) for the purposes of redundancy calculations in the future (should that ne necessary) the calculations will take into account the full time they were employed by the old group as if it were one continuous period of employment.

The model documents for company formation from charities commission prohibit directors of the company from being paid. They also prohibit you from trading with the company for example if you are a plumber or the director of a company you couldn’t do any plumbing or work for that company for playgroup and get paid. It’s common sense really. You do not want to do anything that looks like you are benefiting from this in any way other than the warm glow of community spirit.

Remember, becoming a director of any company will result in your home addresses becoming public knowledge. They are not exactly posted on placards but for a couple of quid anyone can get your details from companies house. And lots of direct mail companies will. If you have any skeletons in your closet; any dodgy financial dealings, non-payment of tax, anything at all that you know you really shouldn’t have done or shouldn’t be doing then don’t bother becoming a director. Stop doing whatever it is of course but please don’t waste your time, the time of colleagues and the reputation of your group. It’s just not worth the risk.

A good example of putting up with some inconvenience in order to be conspicuously honest is who signs the cheques. My wife and I are both directors. When we set up the company we made sure that at least one other parent not related to us was prepared to become a director and it is my wife and that other director who have to countersign cheques. Even though I’m the chair of directors, I can’t write a cheque out. To me this just seems common sense and occasionally it’s inconvenient, but it’s worth the inconvenience to remove any suggestion that any misappropriation of funds is even possible!

On a general point it may be useful to learn of our key fiscal policy with playgroup. We worked very hard early on at fundraising to build up significant cash reserves. Remember, non-profit making doesn’t mean you can’t be profitable, merely that the group has to properly use the profits (at some point) and cannot distribute them other than to another charity for genuinely charitable reasons. Playgroup income can vary hugely particularly when you are at the mercy of the birth rate 3 years ago. Good staff are hard to find and you may invest a lot in training so it’s good to keep them. As a broad policy we like to ensure that we have cash reserves of such a level that if one year we didn’t replace any of our intake then we could afford to keep all the staff for that year until we knew what the next year’s intake was. It’s ok to lose money in a year so long as you have previously made enough profit that you can use this up. The policy has worked well for us. We are currently running at a small loss this year but it’s ok. Next year will pick up and grow the reserves and if it doesn’t then we can give long notices to dedicated staff and generally be good employers.

Remember, while you have to be responsible with the funds, you are not building a business in a commercial sense. You are there to serve the children in the community. After that my personal opinion is that your next obligation is to the staff. If the group folds because of lack of support, the training and goodwill you have invested in your staff will itself still benefit the community.