A social enterprise is a business whose aims are mainly social. Profits are largely reinvested in the business or in the community, rather than given to shareholders and owners. Examples include community development trusts, housing associations, worker-owned co-operatives and leisure centers. Social enterprises can take on a number of structures:
Unincorporated associations;
Trusts;
Limited liability companies;
Some industrial and provident societies such as community benefit societies;
Charities;
Community Interest Companies;
Charitable incorporated organisations.
This guide will outline the differences.
Of course, it is what a business does with its profits that determines whether it is a social enterprise, rather than its specific legal structure. However, it is worth considering the options carefully to ensure the chosen structure is the most suitable in terms of ownership, management style and image.
Unincorporated associations (UAs)
Unincorporated association status is usually chosen when a number of individuals agree or contract to come together for a common purpose. Unincorporated associations are run informally. They are relatively straightforward and cost nothing to set up. They make their own rules for running the organisation and set these down in a democratic constitution or member’s agreement. A management committee is elected to run the organisation on behalf of the members.
Unincorporated associations do not need to register with or be regulated by either Companies House or the Financial Services Authority. They enjoy greater freedom of operation than a company. For example, they don't have to submit annual returns.
If an unincorporated association has charitable objects (or aims), it can apply to the Charity Commission for charitable status. Upon approval it will have to comply with the Commission 's regulations. Unincorporated associations may also have trading or business objectives or carry on commercial activities.
Although an unincorporated association cannot own property, it may be able to set up a trust to legally hold ownership of property and assets for the community they are intended to benefit.
Personal risk unincorporated associations have no separate legal identity. This means that their members will have to sign loans and contracts as individuals and carry the risk of personal liability. UAs are best suited for community type arrangements, for example, a pony club, a cricket club or parent teacher organisation.
Limited companies with a social purpose
Limited liability companies (LLCs) provide a more accountable form of social enterprise than an unincorporated association.
LLCs have objects that set out the company's aims or purposes. Although these objects can be commercial, if your business is a social enterprise, they may be to regenerate an area or provide employment for people with learning difficulties. If you are a charity, you must have an object that the law defines as charitable, such as relieving financial hardship or promoting education.
Types of LLC There are two incorporated forms to choose between when setting up a social enterprise as an LLC:
Private company limited by shares (CLS) - shareholders each hold shares in the company. Their liability is limited to the amount unpaid on shares they hold. A public limited company (PLC) differs from a CLS in that its shares can be sold to the general public;
Company limited by guarantee (CLG)- each of the members gives a guarantee for a certain sum that will be put towards the company's finances if the company is wound up. A CLG cannot raise finance by issuing shares, nor pay dividends to its members.
LLCs often underpin other forms of social enterprise- such as Community Interest Companies (CICs) - in which case you will have to meet additional requirements.
Registration and costs
All LLCs must register (incorporate) and file annual returns at Companies House. LLCs must also submit a set of memoranda and articles of association. A standard incorporation certificate costs £20.
LLCs, with the exception of CICs, can also apply for charitable status if the organisation has exclusively charitable objects.
Community benefit societies (BenComs)
BenComs are incorporated industrial and provident societies (IPS) that conduct business for the benefit of their community. Profits are not distributed amongst members, or external shareholders, but returned to the community. For example, a nursery school might use this form to let staff take part in decision-making:
·Key characteristics of BenComs are;
·They are set up to conduct a business or trade;
·They are run and managed by their members;
·They must submit annual accounts;
·They can raise funds by issuing shares to the public;
·They can apply for charitable status, allowing them to raise capital through public grants and charitable trusts. If approved, they're known as exempt charities - reporting to the Financial Services Authority (FSA), not the Charity Commission.
BenComs are not to be confused with another form of IPS - co-operatives. Co-operatives operate for the mutual benefit of their members and may or may not be a social enterprise, depending on their activities and how they distribute their profits. BenComs and co-operatives are both regulated by the FSA.
To register as a BenCom, you must demonstrate your social objectives and your reasons for registering as a society, rather than a company.
It can cost between £40 and £950 to register a BenCom with the FSA - payable each year. The fee depends on the BenCom's assets and whether it registers under self-written rules or FSA-approved rules.
Asset locks Non-charitable BenComs can now apply an asset lock. This protects their assets for the future benefit of the community. BenComs that do so may only convert to a Community Interest Company (CIC).
Charitable social enterprise
Many social enterprises have charitable status. It is only possible to gain this status if the purposes of your organisation are exclusively charitable and are for the public benefit. Charitable purposes include advancing education or religion, and relieving financial hardship. There are a whole host of other charitable purposes that benefit the community and have been recognised as charitable by the courts or the Charity Commission over many years:
A charitable social enterprise must have exclusively charitable purposes, and those purposes must be for the public benefit;
The directors or trustees are responsible for administration and management and generally must not be paid for this work. However, charities can now pay trustees (including the director) for providing goods and non-trustee or employee services to the charity. A range of safeguards accompany the new power, to prevent conflicts of interest or abuse;
Any profits or surpluses made by the charity must be invested back into the charity and used to support its charitable purposes. They must not be paid out to members of the charity;
Assets must always be used for the purposes of the charity.
Tax and rate relief benefits
Profits of trade carried out by the charity are not subject to tax as long as the profits are used for the purposes of the charity and the trade is carried out for the main aim of the charity.
Chargeable gains are tax-free, for example, disposal of a property.
Tax does not apply on bank interest.
Stamp duty land tax does not apply to charities.
Donations to the charity are subject to tax relief, for example, donations made by UK taxpayers are subject to Gift Aid. This means you can reclaim the equivalent of the basic rate of tax on the total amount of the gift.
Charities benefit from an 80 per cent discount on business rates. Local authorities have the power to offer a further 20 per cent relief.
Regulation and registration
Most charities in England and Wales are regulated by the Charity Commission. HM Revenue & Customs is the regulator in Northern Ireland and the Office of the Scottish Charities Regulator regulates charities in Scotland.
In addition to registering with Companies House or the Financial Services Authority, you must register with the Charity Commission if your organisation is set up under English and Welsh law and is established for exclusively charitable purposes. It must also have an annual income of more than £5,000 a year.
Community Interest Companies
Community Interest Companies (CICs) are limited companies that exist to provide benefits to a community, or a specific section of a community. The CIC has the flexibility of the familiar company form, and access to a range of financing options, so may be appropriate for those working for a social purpose.
Its key features include an asset lock and a community interest statement.
To register as a CIC, you must register as either a company limited by shares or a company limited by guarantee. When registering your company with Companies House, you will need to provide additional documents, including a community interest statement describing your social purpose. The CIC Regulator will approve your application if your statement passes the community interest test - ie the business activities you intend to undertake will be carried out for the benefit of the community or a section of it.
CICs shouldn't be confused with charities. CICs do not have charitable status. This means they do not get the tax benefits of a charity, but in return they do not have the strict reporting requirements of a charity.
CICs have to follow specific rules, including the following
CICs must have an asset lock. This means that the company cannot generally transfer its profits or assets for less than their full market value. It will also protect any remaining assets for the community if you dissolve the CIC;
If you set up your CIC as a company limited by shares, you'll have the option of issuing shares that pay a capped dividend to investors. The cap is set by the CIC Regulator to protect the asset lock;
Together with your annual accounts, you must present an annual community interest company report for public record. The report must show what the CIC has done during the year to pursue its pre-specified community interest and involve the individuals or groups with a particular interest in the CIC.
Charitable incorporated organisations
New as of early 2008 is the charitable incorporated organisation (CIO).This form is specifically tailored for charities registered in England and Wales. It will be available to new organisations and existing charities that meet all the criteria for being a charity but do not want to use the charity form.
Converting to a CIO
Under certain conditions, the following organisations may be able to apply to the Charity Commission for conversion to a CIO, and for the CIO to be registered as a charity:
An existing company which is registered as a charity;
A charity which is a regulated industrial and provident society.
Exempt charities and companies or regulated societies with a share capital - where any of the shares are not fully paid up - will not be able to apply for conversion to a CIO.
Special features of CIOs
CIOs will differ from traditional charities in the following ways
Although CIOs will not use company terminology - directors will be called charity trustees - they will be closer to companies than charities are.
Traditional charities may or may not be incorporated, depending on their legal form. As CIOs are always incorporated, they will be separate legal entities and their members will have either no liability or limited liability.
CIOs - like Community Interest Companies and community benefit societies - will have their assets locked in for the benefit of the community. They will not be able to distribute profits or assets to their members. See the pages in this guide on Community Interest Companies and community benefit societies (BenComs).
Unlike charities, CIOs will report only to the Charity Commission, not to Companies House or the Financial Services Authority.
A choice of formats and administration will be available to suit organisations of all sizes, with or without a membership structure.
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