This blog is NOT intended or designed to provide legal advice. The content on our blog is provided for general information only. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content on our blog.
What are social enterprises?
If you have ever purchased a copy of the Big Issue or shopped at the Co-op you should already be familiar with the concept of social enterprises. Social enterprises are businesses which operate with a social or environmental purpose; they want to change the world for the better.
Today’s post looks at the different legal structures that are available to social entrepreneurs and the factors that may influence your decision to choose one legal form over another.
Setting up a social enterprise
Social enterprises can be unincorporated associations, incorporated organisations and/or charities. There are a number of factors which need to be carefully considered before you decide which legal form may be most appropriate for your enterprise.
Tax: certain tax reliefs and benefits may be acquired by adopting charitable status.
Finance: some legal structures may experience more barriers in securing finance than others.
Management: most forms follow a power structure in which a small group of individuals are responsible for the management and running of the organisation. However, this may not be appropriate for your enterprise and you may wish your stakeholders to have greater involvement.
Regulation: business structures may be regulated by Companies House, the Charity Commission, the Financial Conduct Authority, the Community Interest Company Regulator or a combination of these governing bodies. Other legal forms are unregulated.
An unincorporated association is an organisation that is set up to perform a particular function, for example, to run an after school club. An unincorporated association has a wide membership, is governed by a constitution, and is managed by a management committee. Unincorporated associations do not need to be registered and are free to set up.
Unincorporated organisations do not have a legal identity in their own right therefore the members of the management committee are personally liable for its debts and liabilities. The main advantage of being an unincorporated organisation is that it benefits from relatively ‘light touch’ regulation.
An incorporated organisation is a separate legal entity which is responsible for their own debts and liabilities. This limits the personal liability of individual management committee members. Incorporated organisations have the following features and benefits:
- As a separate legal entity, the enterprise can enter into contracts and employ staff.
- Incorporation limits the personal liability of the individuals responsible for the management of the enterprise.
- The regulation that comes with incorporation may increase public confidence in the organisation.
- Most financial institutions will only provide loan and equity finance to incorporated organisations.
There are a number of different options for those considering incorporating their social enterprise.
Companies may be limited by shares (CLSs) or guarantee (CLGs). CLSs have a ‘share capital’ and this refers to the shares held by the company’s shareholders. The shareholder puts money into the company, and in return the company gives it a percentage of ownership, in the form of shares. The price of an individual share can be any value although usually the ‘nominal’ value of a single share will be £1. With a CLG, there are no shares, hence there are no shareholders. Instead, the company will have ‘members’. The members of a CLG are bound by a guarantee in the company’s articles of association, which requires them to pay the company’s debts up to a fixed sum, usually £1, in the event of winding up the company.
Setting up as a CLG or CLS is relatively inexpensive and easy to do. Both structures will be managed by directors in accordance with the governing constitution. The companies will be registered with Companies House. Profits may either be distributed to members or reinvested back into the company. Once the annual income of a CLS or CLG is £5,000 or above, they can register as a charity with the Charity Commission.
Community interest companies (CIC)
A CIC is a limited company, which has registered to carry out a particular “community purpose” and wants to use their profits and assets for the public good. The primary purpose of a CIC is to benefit the community and not its shareholders, directors or employees. A CIC has a lock on its assets, which prevents profits from being distributed to members other than in limited circumstances.
CICs are regulated by the CIC Regulator. CICs are also companies and must therefore comply with the principles of company law. They can be registered with Companies House however a CIC cannot have charitable status. CICs are required to file a community interest report each year, which includes details of how it has pursued its community interest.
Co-operative and community benefit societies (CBS)
Co-ops and CBSs are registered societies (rather than companies) which are regulated by the Financial Conduct Authority (FCA). The key difference between the two structures is that a co-op is set up to benefit its members whereas a CBS is established to benefit the community more widely. Co-ops and CBSs may also apply to the Charity Commission for charitable status.
Limited liability partnerships (LLP)
An LLP is similar to an ordinary partnership, but it also offers reduced personal responsibility for its business debts. Partners are liable in the winding up of an LLP up to the amount they have agreed (which may be nothing). LLPs have the advantage of being tax ‘transparent’ which means that the members are subject to income tax directly in their capacity as the individual in accordance with their tax status. In terms of management, the LLP is a single tier structure. The LLP partners are the equivalent of directors of a company.
An LLP can be straightforward to incorporate and the rights and duties of members are set out in the LLP’s governing document, the LLP agreement. The LLP agreement can be used to set out the social mission of the enterprise. LLPs have strict disclosure requirements; accounts must be prepared in accordance with the relevant accounting rules and filed at Companies House.
Social enterprises as charities
Many (although not all) of the business structures outlined above can also apply for charitable status. Key features of having charitable status include:
- Public recognition and trust: charities are widely recognised as existing for social good. This can assist with fundraising.
- Asset lock: the charity’s assets and profit must be used in furtherance of the charity’s purposes.
- Tax relief: charities do not pay corporation tax on profits from trading in the course of delivering their charitable aims. Charities receive discounts on business rates.
- Funding: some sources of funding are only open to organisations with charitable status.
- Gift aid: gifts to charities by companies and organisations which pay Corporation Tax are tax deductible. Donations by individuals who pay income tax attract Gift Air relief.
- Regulation: most charities in England and Wales are regulated by the Charity Commission. The Charity Commission is often viewed as relatively ‘heavy’ regulation as it exercises considerable scrutiny over charities. Charities with an annual income of over £10,000 have to file annual reports, accounts and an annual return.
Charitable incorporated organisations (CIOs)
CIOs combine the benefits of being a corporate body, with a separate legal identity and limited liability for its charity trustees and members. All CIOs are registered charities and are regulated solely by the Charity Commission. CIOs are relatively simple and inexpensive to establish. They are governed by a constitution and, for ease, the Charity Commission has produced two forms of model constitutions. CIOs are required to comply with accounting requirements and must file an annual return, report and accounts with the Charity Commission.
The Student Law Office may be able to advise you on the type of legal structure which may be most appropriate for your business or social enterprise. To find out more about making an enquiry, please click here.
This blog was written by Ana Speed. Ana is a trainee solicitor within the Student Law Office and has spent the last six months working in the business clinic. Ana has particularly enjoyed working for social enterprises and advising clients on intellectual property disputes.