Legally, an association is a legal entity with members. An association is formed for a specific purpose, for example, a sports association, and can make its own rules. The law distinguishes between an association with total legal capacity and an association with limited legal capacity. This blog discusses the important aspects of the association with limited legal capacity, also known as the informal association. The aim is to help readers assess whether this is a suitable legal form.
You do not need to go to a notary to set up an association with limited legal capacity. However, there needs to be a multilateral legal act, which means that at least two people establish the association. As founders, you can draft your articles of association and sign them. These are called private articles of association. Unlike with several other legal forms, you are not obliged to register these articles of association with the Chamber of Commerce. Finally, an association has no minimum start-up capital, so no capital is required to establish an association.
There are several things you should at least include in the private articles of association:
- Association name.
- The municipality in which the association is located.
- Association’s purpose.
- Members’ obligations and how these obligations may be imposed.
- Rules on membership; how to become a member and the conditions.
- The method of convening the general meeting.
- The method of appointment and dismissal of directors.
- The destination for the money remaining after the association’s dissolution or how that destination will be determined.
Current laws and regulations apply if a matter is not stipulated in the articles of association.
Liability and limited jurisdiction
Liability depends on registration with the Chamber of Commerce; this registration is not mandatory but does limit liability. If the association is registered, in principle, the association is held liable, possibly the directors. If the association is not registered, the directors are directly liable privately.
In addition, directors are also directly liable privately in case of mismanagement. This occurs when a director fails to perform his duties properly.
Some examples of mismanagement:
- Financial mismanagement: failure to keep proper books of accounts, failure to prepare financial statements, or misappropriation of funds.
- Conflict of interest: using one’s position within the organization for personal interests, for example, by awarding contracts to family or friends.
- Misuse of powers: taking decisions that are not within the director’s powers or taking decisions that are against the organization’s best interests.
Due to the limited legal capacity, the association has fewer rights because the association is not authorized to buy a property or receive an inheritance.
The directors of an association are required by law to keep records for seven years. In addition, at least one members’ meeting should be held annually. As for the board, if the articles of association do not provide otherwise, the association board must consist of at least a chairman, secretary, and treasurer.
In any case, an association is obliged to have a board. The members appoint the board unless the articles provide otherwise. All members together form the association’s most significant body, the members’ general meeting. The articles of association may also stipulate that there will be a supervisory board; the main task of this body is to supervise the board’s policy and the general course of affairs.
Whether the association is liable to tax depends on how it is carried out. For example, if an association is an entrepreneur for VAT, runs a business, or employs employees, the association may face taxes.
Other characteristics of a limited liability association
- A membership database, this contains the details of the association’s members.
- A purpose, an association mainly organizes activities for its members and, in doing so, does not aim to make a profit.
- The association must act as one within the framework of the law. This means that individual members may not act with the same purpose as the association. For example, an individual member may not raise money for a charity on his initiative if raising money for this charity is also the common purpose of the association. This may lead to confusion and conflicts within the organization.
- An association has no capital divided into shares; as a result, the association also has no shareholders.
An association is terminated upon the decision of the members at the general membership meeting. This decision must be on the agenda of the meeting. Otherwise, it is not valid.
The association does not immediately cease to exist; it is not entirely terminated until all debts and other financial obligations have been paid. If any assets remain, the procedure set out in the private articles of association should be followed.
Membership may end by:
- The death of a member, unless inheritance of membership is permitted. According to the articles of association.
- Termination by the member concerned or the association.
- Expulsion from membership; the board takes this decision unless the articles of association designate another body. This is a legal act whereby a person is written out of the membership register.