Social enterprises are an example of business being used for community good. But what’s the best way to go about structuring one to achieve results?
Like traditional businesses, social enterprises aim to make a profit but it’s what they do with their profits that sets them apart. Social enterprises reinvest or donate at least half of the money they make to charity or to local organisations to create positive change.
They exist in nearly every sector, from coffee shops and cinemas, to healthcare and facilities management.
According to Social Enterprise UK, there are over 100,000 across the country which contribute £60 billion to the economy and employ two million people.
If you have an entrepreneurial spirit, a social enterprise might seem like an exciting prospect for you, but how are you going to structure it?
This isn’t usually an issue when your income and activities are small, but if you want to win contracts, apply for funding, get investment and hire people, you’ll need to get this right.
First, let’s bust a myth: that a registered charity isn’t and can never be a business. In reality, they absolutely can, and social enterprises can be charities – HCT Group, London Early Years Foundation and Turning Point are a few examples.
Traditionally, charities aim to fund their social mission through grants and donations, but if they earn at least of its income through trading and reinvests it for social good, then they are a social enterprise.
If a charity is to trade, it must have the power to do so in its governing documents. There are two types of trade it can then carry out:
- Primary purpose trading: trading a charity carries out in fulfilment of its main purposes e.g. educational charities charging for their courses.
- Non-primary purpose trading: trading that is outside the main objective of a charity, either for expansion or to raise funds.
Having your social enterprise registered as a charity carries a number of benefits.
Most obviously, there’s what being known as a charity will do for your brand and fundraising efforts, as they are recognised by the UK public as existing for social good.
Charities also benefit from a variety of tax reliefs, including an exemption from corporation tax on profits undertaken in what’s known as its ‘primary purpose trading’, and an exemption from VAT on some goods and services.
Traditional funding, such as grants, will also be open to charities, and some are only available to organisations with charitable status.
Be wary that you may face a number of restrictions on how these sources of funding can be used, however, and may also face restrictions on the work you can do.
Charities must also comply with regulatory requirements, including those relating to the preparation of annual accounts and returns.
Individuals on the board of a charity, referred to as trustees, are also typically not paid, which could prove a problem for motivation, productivity and attracting the best talent on your board.
Community interest company
A community interest company (CIC) is a structure specifically created in 2005 for social enterprises.
They’re best thought of as a special type of limited company that exists to benefit the community rather than private shareholders.
As such, it will be much more involved in commercial trading and face far less restrictions in what it can do than a charitable registered social enterprise.
A CIC can either be a company limited by guarantee (CLG) or a company limited by shares (CLS).
CLGs have no shareholders, only ‘members’ who cannot personally profit from the company. CLSs don’t face this constraint but must be clear about what will happen with its profits in its governing documents.
Because CICs are essentially limited companies with all the benefits limited liability brings, they also have a structure that is very familiar to the business community and flexible enough to be tailored to the specific needs of the CIC.
Meanwhile, CIC directors are paid and aren’t subject to the same ‘voluntary’ regime as charity trustees, which can help with recruitment to the board.
They are subject to the normal tax treatment of a commercial company, however, and will be in competition with charities that benefit from tax allowances and wider recognition as a source for positive change.
Outside of CICs and charities, co-operatives are the other most common form of social enterprises.
They function first and foremost as a business, only this time they are more participative and democratic in their ownership models.
They can be formed with at least ten initial adult members, and practice an open membership policy so that anyone with an interest in the co-operative, from customers to suppliers, can join.
Members have the ultimate say in how the co-operative is run under the principle of one person, one vote.
They can be attractive for people who not only want their business to help their wider community through donations and charitable work, but by giving local people a stake in the enterprise itself.
With limited liability and a separate legal existence from any member, co-operatives tend to last – according to Co-operatives UK, 76% survive the first five years of business, compared to just 42% of new companies.
However, some co-operatives struggle with getting managers of a strong calibre and with motivating individual members because of a lack of direct link between effort and reward.
On the other hand, others experience a boost in productivity among employees, while management costs can be cut down with the help of voluntary members lending a hand.
Whichever structure you decide on for your social enterprise, there’s a lot of things to think about from tax efficiency to individual control, and regulations to representation.
At Rogers Spencer, we can help you understand what’s most important to you for your social enterprise so you can make the right decision.
Require more information?
For more information regarding social enterprise structures, please feel free to contact our friendly team at Rogers Spencer today. Reach out to us on 0115 960 8412 or fill out a contact form to discuss your social enterprise.