An association with limited legal capacity – an informal association – is a legal person, and that is the point most often misunderstood about it. It can be formed without a notarial deed, simply by agreement between the founders, and it can hold assets, enter into contracts and sue and be sued in its own name.
What it cannot do is acquire registered property and act as an heir. Those two limitations are the whole of the difference in capacity, and for most sports clubs, neighbourhood associations and hobby groups they are irrelevant.
Liability of the board: the real difference
The consequence that does matter concerns the directors. In an association with limited legal capacity, directors are jointly and severally liable alongside the association for debts arising from legal acts that become due during their term of office – and that liability continues after they step down, in respect of those debts, to the extent that the sitting directors are not liable for them. A director who can show that the failure is not attributable to him and that he took steps to prevent it can escape liability.
The most useful fact in this whole area is what registration does. Once the association is registered in the commercial register, the director’s liability becomes subsidiary: he is liable only to the extent that the creditor makes it plausible that the association itself will not pay. Registration is not compulsory for an informal association, and it is the cheapest piece of risk management available to its board.
Setting one up
No notarial deed and no minimum capital are required. Articles can be recorded in a private document, and doing so is strongly advisable: they should state the name, the seat, the purpose, how members are admitted and removed, how the board is appointed, how the general meeting decides, and what happens to any surplus on dissolution.
An association may not distribute profits to its members. It may make a profit; it may not pay it out to them.
Governance rules that apply anyway
The Management and Supervision of Legal Entities Act applies to associations, including informal ones. It requires arrangements for conflicts of interest, for absence or inability to act of directors, and it sets the standard for improper management in the event of insolvency. Articles drawn up before that legislation frequently lack the required provisions, and reviewing them is a short job with a real effect on directors’ exposure.
Comparison with full legal capacity
An association with full legal capacity is formed by notarial deed. It can acquire registered property and be an heir; its directors are not personally liable in the way described above; registration in the commercial register is compulsory; and it must record its ultimate beneficial owners in the UBO register, which an informal association need not.
Converting from limited to full legal capacity is done through the notary by amending the articles. The legal person remains the same, so contracts, assets and memberships continue unaffected.
Association, foundation or owners’ association
An association has members and a general meeting that ultimately decides. A foundation has no members and is governed by its board, which makes it unsuitable where the participants want a say. An owners’ association arises by operation of law on the division of a building into apartment rights and follows its own rules.
Advice
We draw up and review articles, advise boards on liability and on the governance requirements, and act on conversions to full legal capacity. Please contact Law & More.
