Status Options for Social Enterprises
Choosing an appropriate legal structure for your organisation is a bit like choosing the right clothes for a job. In making this choice, you need to consider carefully your organisation’s overall aims and objectives, and how it is to be managed and financed. All of these will influence the decision as to whether or not to incorporate and if so in what form, and whether charity status is advisable.
The advice is always to choose a status which fits your organisation rather than trying to fit your organisation to a particular status. Get good advice (e.g. through BusinessLink or your local CVS), as changing your status later on is not as easy as changing your clothes!
Incorporation
What is it?
Incorporation provides an organisation with a legal identity which separates and distinguishes it from the individual members of its management committee and its members. It provides a means of protection for those involved in the organisation, limiting their individual liability in its activities. The most common forms of incorporation are limited companies (of various types) but there are other options too – see below.
When is it needed?
Incorporating an organisation is necessary or advisable if it
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Wishes to enter into substantial contracts. An unincorporated organisation cannot enter into a contract; an individual member of the organisation would have to enter into the contract on its behalf, and would then become formally responsible and liable for the contract.
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Intends leasing or owning property. Similarly to above, an organisation can only lease or own property in its own right when it is incorporated.
- Employs staff
- Is undertaking an activity with significant risk attached
As well as forming a separate legal entity, incorporation provides public accountability for your organisation, and the recognition that this commands.
Charitable Status
To become a charity an organisation must have aims which are exclusively charitable and for public benefit (as defined by the latest Charities Act).
An organisation can have charity status by applying either to the Charity Commission to become a registered charity or to the Inland Revenue for exempt charity status. (In the latter case it will not have a charity registration number.)
Charity status can be a distinct benefit to some organisations, but there are also disadvantages which need to be considered before deciding to become a registered charity.
The benefits of having charity status, particularly as a registered charity include
- Prestige and accountability
- Public recognition and support including from funders
- A full asset lock, ensuring that the charity’s assets cannot be sold on or distributed for less than their market value, and must be transferred to a charity with similar aims if the charity is wound up.
Both registered and exempted charities may benefit from a discretionary 80% relief from business rates, corporation tax relief, and Gift Aid on donations.
However being a registered charity may not be advantageous if you are considering trading or setting up a social enterprise.
Factors to consider include:
- The stated purposes of the organisation must be entirely charitable
- There are restrictions on trading other than for primary purpose activities
- Trustees cannot be employed by the organisation (as a general rule) so neither can employees be appointed to the trustee board
- No distribution of assets whatsoever is permitted so equity financing cannot be an option (see the webpage on finance for social enterprise)
- The added task of administration to meet the Charity Commission’s regulation requirements.
It should be noted that if an organisation’s aims are entirely charitable and it has an income of more than £5,000 per year, then it is legally required to register with the charity commission.
Charity status is a recognised legal status, but it does not provide a separate legal entity in the way that incorporation does.
The charity commission provides a multitude of useful guidance notes – see www.charity-commission.gov.uk
Forms of Incorporation – Options Available
There are currently 4 basic options available, and a fifth that is expected to become available in 2009.
- Company limited by guarantee (CLG)
- Company limited by shares (CLS)
- Community Interest Company (CIC)
- Industrial and Provident Society (IPS)
- Charitable Incorporated Organisation (CIO)
1. Company Limited by Guarantee
- This is the most common form of incorporation used by community and voluntary organisations including registered charities. Instead of shareholders there are guarantors who guarantee to pay a nominal fee (usually £1) in the event of the company being wound up with outstanding debts.
- Registration is through Companies House and is quick and easy to establish with low registration fees.
- A CLG cannot issue shares so there is no option of equity investment
- If both a registered charity and a CLG there is the onerous administrative duty to provide information and accounts to both regulators, i.e. the Charity Commission and Companies House.
2. Company Limited by Shares
- This legal structure is primarily aimed at ‘for profit’ (private) businesses where the shareholders / investors are the owners and receive a financial return from the profits in proportion to their shareholding. However it is a flexible form which can be adapted for social enterprise, but is best registered as a CIC (see below) to reduce the risk of conversion to a private company.
- A company limited by shares is also a suitable form for a charity’s trading subsidiary, where the charity would then be the sole shareholder.
3. Community Interest Company (CIC)
This is a fairly new type of limited company, developed with ‘not quite charitable’ social enterprises in mind.
A CIC takes the form of a company limited by guarantee or by shares but with an additional overlay which
- Requires that the company has social objectives that pass a community interest test, and that an annual community interest report to be produced
- Provides an asset lock which, like a charity, prevents the company’s assets from being privately distributed. (The company’s governing document must name an asset-locked organisation to inherit its assets should the company be wound up.)
- In the case of a CLS CIC sets a dividend cap and cap on the proportion of profits which can be distributed to shareholders
CICs are regulated by the CIC Regulator.
4. Industrial and Provident Society
- An Industrial and Provident Society can take one of two forms: a bona fide cooperative (sometimes called a cooperative society) or a community benefit society (also referred to as a ‘Bencom IPS). A cooperative is set up to benefit its members, e.g. a workers cooperative or a consumer cooperative, whilst a community benefit society is set up to benefit a wider community beyond its members
- IPSs are regulated by the Mutual Societies Registration section of the Financial Services Authority (FSA). This has different administration procedures from Companies House
- The structure allows for equity investment from its members with a limited return on this investment. The amount of equity raised can be large or small: examples range from £10,000 or less up to several million.
- A Bencom IPS may be eligible for charity status. If it has a turnover of less than £90,000 it can apply to HMRC for exempt charity status. Above this threshold it has to apply to become a registered charity.
- The initial set up of an IPS can be costly compared to setting up a limited company
- The IPS brand is well understood in cooperative circles, but is not always recognised elsewhere.
5. Charitable Incorporated Organisation
This is a new legal form has been introduced in the Charities Act 2006 to allow charities to be incorporated under one regulator, the Charity Commission. Until now charities wishing to incorporate have had to register with and file returns to both the Charity Commission and Companies House. This legal form is likely to become available in 2009.
What Informs Your Choice of Structure?
Your choice of legal status will influence who ‘owns’ the organisation, how it is governed, how stakeholders can be involved, how it is financed and what activities it can legally undertake.
For example, a registered charity has the benefits of a recognised status and accountability which can attract grants and donations; on the other hand there are limitations on what a charity can trade, and employees cannot be elected to the Trustee Board so can’t be involved in strategic decision-making about the organisation.
Further Information:
‘Keeping it Legal: a guide to Legal Forms for Social Enterprise’ – Bates, Wells and Braithwaite (2005), available from the Social Enterprise Coalition.
Useful Links:
- Charity Commission – www.charity-commission.gov.uk
- Companies House – www.companieshouse.gov.uk
- CIC Regulator – www.cicregulator.gov.uk
- Financial Services Authority (FSA), Mutual Societies Regulation section – www.fsa.gov.uk/Pages/Doing/small_firms/MSR/index.shtml
