Company legal structure
Being a social enterprise is not in itself a formal legal structure. Social enterprises can take a variety of forms and we are often asked what structure is best.
The answer will depend greatly on your intended strategy and this is why a properly completed business plan is vital.
For example, if the intention is to be dependent on grant funding, then it is likely that you will want to become a charitable organisation. This in turn will place restrictions on the ability to trade and pay those who are running the organisation.
Alternative structures, such as Community Interest Companies (CIC), can readily engage in trading activity and the Articles of Association (a CIC governing document) allow directors to be paid. However, there will be fewer grant funding opportunities.
One of the best ways to help decide which structure you should adopt is to visit the Co-Operatives UK Tool.
With a complete business plan Inspire2Enterprise can suggest which structure is most appropriate and support you in the process of setting up the organisation.
To speak to us about legal structures, contact us.
Types of structures available for social enterprises are:
- A Trust, which is an unincorporated body that has no separate legal identity but which is managed by trustees who are personally liable for the debts of the trust.
- The social objectives of a trust are protected in a trust deed, which also establishes the trust’s rules of governance.
- Trustees cannot benefit from the trust but must act on behalf of the community, however they can own assets and property on behalf of the trust.
- Typical examples of trusts include those set up to manage village halls or to run community arts organisations
Community Interest Companies (CICs)
A Community Interest Company (CIC) is a form of company specifically created for the social enterprise sector.
Are required by law to have provisions in their articles of association to enshrine their social purpose, specifically an ‘asset lock’, which restricts the transfer of assets out of the CIC, ultimately to ensure that they continue to be used for the benefit of the community; and a cap on the maximum dividend and interest payments it can make.
CIC structure provides a clear signal to investors that the enterprise operates for the benefit of the community, and that this social purpose is protected by proportionate regulation.
The process for setting up a CIC is relatively simple. It is essentially the same as that for a limited company except that those wishing to register a CIC must also submit a second form comprising a community interest statement, providing evidence that the CIC will meet the community interest test defined in law.
An Industrial and Provident Society (IPS)
IPS is a type of mutual society that is a corporate entity but which has rules of association similar to an unincorporated association. Its members benefit from limited liability although it is not subject to the Companies Act 2006 but is regulated by the Financial Conduct Authority (FCA) under the Co-operative and Community Benefit Societies’ Act 2014.
There are two types of IPS that are typically used by Not For Profit Organisations:
- A Co-operative society, which is a democratic organisation based on the principle of one member, one vote – irrespective of how many shares they hold. Co-operatives are run for the mutual benefit of members and surplus profits are re-invested in the organisation. Examples of co-operatives include credit unions, which involve members pooling resources to provide their colleagues with low-cost loans and facilities for saving and borrowing, and retailers such as the ‘Co-op’.
- A society run for the benefit of the community, which must show how its activities will benefit the whole community and not just its members. Such societies are run by their members and can raise funds by issuing shares to the public but must submit annual accounts to the FCA. There are special rules regarding how surplus funds can be used and how any assets remaining after the society is dissolved should be distributed. This type of society must be able to show why it should not simply be registered as a company under the Companies Act 2006. For example a nursery school could be run as a society for the benefit of the community.
Of the two types of IPS, only a society run for the benefit of the community can apply for charitable status.
Limited Liability Partnership (LLP)
- A hybrid of a Company and a traditional Partnership.
- Preserves the basic aspects of a traditional Partnership whilst including the valuable aspects of a Company such as Limited Liability.
- Separate Corporate Structure.
- Taxed as a Partnership (Tax Transparent, i.e individual partners are liable to tax).
- Typically used by professional services firms such as lawyers and accountants.
Charitable Incorporated Organisation (CIO)
- First ready-made corporate structure specifically designed for charities.
- Similar ownership, governance and constitution to company but with different terminology (e.g. for “directors” read “charity trustees”).
- Members either have no liability or limited liability.
- No members. Charity trustees: only if constitution, court or Charity Commission permits.
- Cannot be anything but a charity, and must meet the criteria for being a charity.
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.
- An ‘unincorporated association’ is an organisation set up through an agreement between a group of people who come together for a reason other than to make a profit, eg a voluntary group or a sports club.
- You don’t need to register an unincorporated association, and it doesn’t cost anything to set one up.
- Individual members are personally responsible for any debts and contractual obligations.