What are the main social enterprise legal structures?
The question of what is the appropriate legal structure for a new, or even an existing, social enterprise can often seem complex. It is, by its very nature, often full of acronyms and technical language that is sometimes difficult to follow. It remains however a crucial question as getting it right in the first instance saves a lot of time and effort trying to change it at a later date.
The first point to note is that the term “social enterprise” covers a multitude of virtues. It has been defined:
“A social enterprise is a business with primarily social objectives whose surpluses are principally reinvested for that purpose in the business or in the community, rather than being driven by the need to maximise profit for shareholders and owners.” (Dept Trade & Industry).
It is not a formal legal structure in itself, but consider it as an umbrella term for a variety of organisations that are engaged in” trading for a social purpose.”
The primary consideration is whether to incorporate. Often this is self evident as unincorporated organisations do not have a separate identity from those who make up the people involved in its running. That is to say each member of the Unincorporated body is jointly and severally, personally liable. Someone pursuing the organisation for, say an unpaid bill can make that claim against any of the committee, and usually this will be whoever is better off, even though their involvement may only have been peripheral.
When an organisation is incorporated, it creates, in the eyes of the law, a separate entity, than “can sue or be sued”. Hence the use of the term limited, which refers to the limitation placed on liability, of the company (in the absence of wrong-doing by the directors), to the amount of share capital or, as discussed below, any guarantee. The fundamental question then is “how much can one afford”? If one is engaged in a trading activity (and it is expected all social enterprises will be), taking on staff, premises and other potential liabilities, then it is suggested the best course is to become incorporated. That is not to say the thousands of unincorporated organisations do not fulfil a vital and substantial part of third sector activity.
There are a variety of incorporated legal structures that meet the broad description given above, and it is important to remember one size does not fit all. Charities, for example, are usually restricted from trading activity, subject to a number of exceptions. The main one is termed “primary purpose” trading. Trustees have very different roles to say, directors. Until recently, the law behind charities was hundreds of years old, and there are stringent tests imposed by the Charity Commission before you can become a registered charity. One must meet the public benefit test and have a charitable purpose. It does open a number of funding opportunities however. The usual approach is to create a company limited by guarantee and apply for charitable status. This to some creates a “servant to two masters” as one must account to both Companies House and the Charity Commission.
Do be aware it is not compulsory to go for charitable status. You could remain as a Company Limited by Guarantee (CLG). This essentially means no shares are issued and there is a promise to pay, in most cases a nominal sum such a £1, in the event the company is wound up. These have long been available, but do remember there is no formal restriction on the distribution of surplus. That is the directors can pass what is known as a special resolution, thereby altering the Articles, to allow profit distribution. Agreed one could have a formally drafted governing document, but one has to ask why, when a CIC (see below) is available.
A new format, which has long been discussed, and still not yet with us is the Charitable Incorporated Organisation (CIO). This it is hoped will be a structure adopted by many charities allowing a degree of more flexibility. It is suggested these will be available in the not too distant future. Clearly however they are not appropriate if a formal structure is needed in a short space of time.
In contrast, Community Interest Companies (CIC), a relatively new form, which are specifically not charitable, are a lot more flexible when it comes to trading. However, whilst some funding is available, they do not enjoy some of the tax advantages of charities. These are essentially the same as limited companies (by guarantee, shares or plc), but with restrictions on what may be distributed by way of profit. They can be created relatively easily by adopting the model articles on the CIC regulator website, and the costs of doing so are very low. They provide a recognisable structure for social enterprise activity and there are now around 9000 registered. Some find however the regulations too restrictive.
Industrial and provident societies are another formal structure that can be adopted. This might be appropriate in situations where there is an element of cooperative working or an asset that is to be community owned. So you might find Housing Associations adopting this format. They are governed by Rules, which can in turn be expensive to create and are regulated by the Financial Services Authority (FSA).
Whichever legal structure is correct for you will depend largely on your strategy, financial management and sources of funding, and often on the ability to run a business in a sustainable manner. Often there is an element of shared ownership and there should always be some form of restriction on the distribution of any profit or surplus.