Businesses established with a social mission, social enterprises are becoming an increasingly widespread feature of the UK commercial landscape. Founders look to solve pressing issues that society faces by bringing their skills, experience and passion to the table.
A social enterprise is not characterised by its structure, but rather its nature, aims, use of profits and participation by or engagement with stakeholders. Choice of structure, however, can have a significant impact on governance and flexibility of a social enterprise further down the line, with issues such as risk management, taxation and access to funding potentially being affected by an inappropriate structure. Getting the structure right early on can help to avoid issues arising and make the growth of the social enterprise and its ability to deliver on its social mission far smoother.
The following table sets out some of the key features of the main structures used by social enterprises, and the key differences between them: This is not an exhaustive list, but is meant to provide an indication of the differences between each structure.
How should you structure your social enterprise?
Structures for social enterprises can broadly be set out in three categories:
• Unincorporated associations
• Limited liability structures
• Charitable structures
Set out below are the key features of different structures under each of these categories as well as some useful considerations for anyone looking to form a social enterprise.
|Structure||Limited liability?||Regulated by||Equity Financing||Can it trade?||Can profits be distributed?||Protections for the social mission?|
|Unincorporated organisation||No||n/a||No||Yes||Yes||A constitution may provide limited protections|
|Limited company (shares)||Yes||Companies House||Yes||Yes||Yes||Articles of association can be modified shareholders agreement|
|Limited company (guarantee)||Yes||Companies House||No||Yes||No||Articles of association can be modified|
|CIC||Yes||Companies House||Yes (if limited by shares)||Yes||No – asset lock||Asset lock purpose enshrined in articles of association|
|Co-op or CBS||Yes||FCA||Limited membership financing||Yes||To members (if a co-op) but not is a CBS – asset lock||Membership governance|
|LLP||Yes||Companies House||Yes – to Partners||LLP Agreement can include protections|
|Charity||Yes||Charities Commision (may also be Companies House if a charitable company)||No||Only for primary charitable purpose||No – asset lock||Enshrined in constitution|
|CIO||Yes||Charities Commision||No||Only for primary charitable purpose||No – asset lock||Enshrined in constitution|
Groups of people who came together without a formal legal structure, unincorporated associations tend to be governed by a constitution that sets out their rules and are run by a Committee elected from their membership. Sometimes, a person or persons might operate as a sole trader or partnership. Such organisations have some advantages, including that they are less administratively burdensome and have lighter regulation which can be particularly useful for smaller enterprises. However, all such organisations are characterised by personal unlimited liability for their management where things go wrong (they are not ‘limited liability’). It can also be difficult for such organisations to access funding such as debt finance or grants.
Limited Liability Structures
There are several options for Social Enterprises looking to adopt a limited liability structure. As well as limited liability for those involved, they have several benefits over unincorporated organisations, including an ability to set out the aims of the social enterprise in a binding constitution. However, they also come with an increased level of regulation.
a) Companies Limited by Shares
Defined by share capital, where shares are issued to shareholders and represent their ‘share’ of the company, the liability of such a company is limited to the amount of investment of each shareholder. Shares can be issued to the shareholders of the company (including investors), allowing the company access to equity investment.
Limited companies are managed by directors, who are answerable to the shareholders. The directors will operate the company on a day-to-day basis, with the shareholders holding certain rights and powers. Such rights and powers will be set out in the company’s constitutional documents, its articles of association. These set out how the company will operate, for example how it conducts meetings, distributes profits and appoints or removes directors.
Social enterprises using this structutre will generally have detailed ‘objects’ clauses, setting out what the social enterprise’s objectives are and how they will go about them. They may also have additional provisions in their constitutions to protect the social mission of company, for example limiting distributions to shareholders, or requiring a percentage of profits be re-invested into the social mission.
b) Companies Limited by Guarantee
These are very similar to companies limited by shares, but instead of shareholders they have ‘members’ who give a nominal guarantee to the company (usually £1 or a small membership fee), to which their liability is limited.
Companies limited by guarantee do not have a profit distribution structure built into them, as they do not have shares, and are generally used by not-for-profit organisations or charities. This can make them useful to someone wanting to run an organisation on a not-for-profit basis, and removing the expectation of distributions to shareholders. A company limited by guarantee is also capable of being a charity as well as a company. Depending on the nature of the social mission, this can be a benefit and unlock charitable funding.
Both companies limited by guarantee and by shares must be incorporated and registered with Companies House. They come with enhanced regulation over unincorporated associations, and will need to file information (including accounts, the details of directors and any persons with significant control) with Companies House.
A CIC (Community Interest Company) can be established as a company limited by shares or by guarantee. It offers additional protections for the particular social mission of the company, including that a CIC must fulfil a ‘community purpose’ and have an asset lock, preventing assets or profits being distributed to members or shareholders.
CICs are a popular structure for social enterprises, allowing directors to be paid and remain in control of the Company, whilst ensuring assets and profits are applied for the benefit of the community served.
Regulation is similar to that of a limited company, with the added requirement of needing to produce a community interest report each year in order to keep its status. There are also additional requirements on incorporation, including that the prospective CIC must state its social mission to Companies House. This is more onerous than the requirements for a ‘regular’ company, but less so than for a charity.
d) Co-operative and Community Benefits Societies
Regulated by and registered with the FCA, co-operatives (Co-ops) and community benefit societies (CBS) are organisations which give a broad membership equal stake and equal say in management. A Co-op benefits its members, where a CBS benefits the community.
CBSs can issue share capital of up to £100,000 to any one member and can allow for redeemable (withdrawable) shares, which can be a useful way of accessing inexpensive financing from members without all the regulatory requirements of issuing shares to the public.
Good examples of social enterprises using a Co-op or CBS structure include organisations owning their local pub as a community asset, or community energy installations. CBSs are, at the time of writing, exempt charities for tax purposes.
An LLP is a limited liability partnership. They will not be appropriate for all social enterprises, but can be useful in certain circumstances, including where two or more entities are seeking to work together. The LLP agreement between the parties can be used to set-out and protect the social aims of the parties, whilst the original parties retain their identities.
Charitable structures are regulated with the Charities Commission, and come with enhanced regulation, but also a beneficial tax regime.
Charities are registered with the Charities Commission and can take many forms. If it is also a limited company a charity will also need to be registered with Companies House. A charity faces a greater level of transparency and governance than a limited liability company, and any profits must be re-invested into the charity.
Charities are managed by Trustees, who have fiduciary duties to the charity, and are held to higher standards of conduct than company directors of limited companies. They are also expected to act in good faith, for the public benefit, and in promotion of the charity’s charitable purposes.
For some organisations, this is an advantage, giving clarity of purpose and bringing the charity’s aims to the forefront. However, a charity cannot be ‘for profit’, and will not be able to access any equity finance. Charities are also only able to trade in fulfilment of their primary purpose, which can be counter to the aims of some social enterprises, which may wish to grow, develop and diversify.
Charitable Incorporated Organisations are a legal structure similar to a limited company, but regulated by the Charity Commission. CIOs have limited liability and are separate legal entities, but are subject to the same restrictions that apply to charities.
The choice of structure of a social enterprise can have lasting effects on the enterprise. Whilst the initial focus of founders will rightly be on how the enterprise can grow and best achieve its social purpose, taking the time to consider the most appropriate structure and taking legal advice early can help the enterprise deliver in the long run.
If you have any questions about social enterprises please contact Kieran van Bussel or Alexandra Watson. You may also be interested in B-Corp certification, and more information on B-corps can be found here.