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How do I set up a social enterprise?

Social enterprises are businesses that aim to deliver social or environmental change. Here are key things you need to know about setting up a social enterprise.

How do I know if the type of business I want to create could be a social enterprise?

If your aim is to make a personal profit, setting up a social enterprise is probably not right for you. Social enterprises are businesses – they’re commercial and aim to make profits – but their purpose is to use most of the money for social, community, ethical or environmental benefits.

For example, Bookdonors is a business that gets second-hand books from charities and libraries and sells them on the internet. About 25% of the money raised goes back to the suppliers – this is a commercial dimension. Vast numbers of books avoid going into landfill – this is an environmental dimension. The business trains and employs people with disabilities and those who’ve been long-term unemployed – this is a social dimension.

What are examples of different types of social enterprises?

Examples of types of social enterprises include:

  • Social businesses / community interest companies, e.g. Jamie Oliver’s Fifteen restaurants
  • Housing associations
  • Co-operatives
  • Credit unions
  • Employee-owned businesses.

What’s the legal structure of a social enterprise?

There isn’t a single legal structure for social enterprises, but here are the main types.

Sole traders and partnerships – Social enterprises can be sole traders (individual self-employed people) or partnerships (where two or more people come together) who decide to donate the majority of their profits to a good cause.

Limited company – A limited company has a legal identity that’s separate from its members and directors, therefore individuals’ personal liabilities are limited. Companies are governed by a board of directors (which can be just a single person) and must comply with Companies House requirements, including filing annual returns and accounts. A limited company may also be a charity (see the ‘Charitable Incorporated Organisation’ item).

Unincorporated or incorporated registered charity – To become registered, a charity has to meet one of the Charities Commission’s defined objectives, and be run by a voluntary Board of Trustees. An incorporated charity is one that is also registered with Companies House, i.e. it’s a charity but it’s also incorporated like a company. Many charities seek incorporation in order to  mitigate personal liability for the trustees and members.

Charitable incorporated organisation (CIO) – This is a relatively new type of legal status that’s been designed to enable charities to have the benefits of incorporation while only needing to comply with charity regulation, i.e. they don’t have to also comply with company law.

Community Interest Company (CIC) – Unlike other types of limited company, a CIC has to have a social mission. A CIC has to pass a community interest test imposed by a regulator, which examines the motivation of the company – including who it will help and how – and what it will do with any profit or surplus.

Industrial and provident society – These are in essence co-ops that are run by and for their members, but which can also operate for the benefit of the wider community. They have to register with the Financial Services Authority (FSA) and also meet specific FSA conditions.

What are the pros and cons of the different types of legal structure?

Here are key advantages and disadvantages of each type of structure.

Legal structureAdvantagesDisadvantages
Sole traders and partnerships• More control – not subject to the same types of rules and regulations faced by limited companies and charities.• Can be difficult to raise capital
• Individuals are personally liable for any losses.
Limited company • Has a separate ‘identity’ from its members, so individuals have fewer liabilities
• Can own property and hold contracts
• Directors can be paid (in addition to just their expenses).		• Can be difficult or even impossible to get donations and grant aid
• People have to take on more responsibilities e.g. they need to be company directors 
• Have to meet Companies House reporting requirements.
Unincorporated registered charity• Can be easier to raise money from trust funds and companies
• Can get tax breaks.		• Individuals face more responsibilities – they become trustees (and cannot be paid apart from expenses) and are personally liable for what the charity does
• Might face restrictions on trading (e.g. depending on what’s being traded).
Registered charity with limited company statusCombines some of the advantages of a registered charity and limited company e.g
• Has a legal identity that’s separate from its members and directors, so individuals’ liabilities are limited
• Can be easier to raise money from companies and trust funds 
• Can qualify for tax breaks.
 		• More regulations in return for tax benefits
• Individuals have more responsibilities – they become trustees (and cannot be paid apart from expenses)
• Compliance with Companies House requirements as well as those of the Charities Commission
• Might be restrictions on trading (e.g depending on what’s being traded).
 
Charitable Incorporated Organisation (CIO)• Combines many of the advantages offered by registered charity status and incorporation
• Only need to file annual returns and accounts with the Charity Commission, not Companies House, which can save time and costs. 		• Trustees have management responsibilities and may be liable for incidents such as wrongful or fraudulent trading
• The structure is relatively new and untried.
Community Interest Company (CIC)• Combines freedom of entrepreneurial action with protection of how assets can be used
• Can access business start-up funding
• Can own property and enter into contracts 
• Directors can be paid (in addition to expenses) 
• Regulation is relatively light. 
 		• Need to comply with two sets of regulations (Companies House and CIC regulator)
• Individuals face more responsibility – they become company directors
• Can be difficult to raise donations and grant aid
• No tax breaks.
 
Industrial and provident society• Has a legal identity that’s separate from its members, so individuals’ liabilities are limited
• Can own property and enter into contracts
• Enables democratic ownership and control		• Need to comply with FSA requirements, e.g keeping and filing accounts
• Structure is not as well recognised compared to limited companies, registered charities etc.

 

How do I know what sort of structure to choose?

Consider the pros and cons outlined in the above section, and in particular think about the following factors.

Liability

Setting up your enterprise as a limited company, a community interest company, an industrial and provident society, or a incorporated registered charity, will protect you from liability if your enterprise causes or suffers financial loss. An exception to this would be if you acted negligently or fraudulently – in these cases you would still be personally liable.

Shared ownership

If you’re happy to share ownership you might consider an industrial and provident society model (co-op) where each member has one vote. Another option would be the one that most UK social enterprises choose: a company limited by guarantee. If each member guarantees the same amount (which can be just £1) they normally have a vote each, which makes for an equal voting structure. To find out about setting up a co-op go to the Co-operatives UK website.

Concentrated ownership

If your aim is to keep ownership and control you might want to set up a company limited by shares. The more shares you have, the more control you have. Companies like this normally distribute profits to the owners via dividends. However, many grant making bodies may not give to this type of company as they worry about their money profiting business owners instead of the community.

Funding

Decide what type of funding you will rely on in the long-term and choose an appropriate structure. For example, being a charity may open doors to donations and grants but your ability to raise money from trading may be limited (depending on what type of trading you want to do), and people won’t be able to buy shares in your enterprise.

Use of profits

The way you use your profits will be governed by your legal structure. For example, registered charities and some sorts of co-ops will usually reinvest profits in their business as they’re not allowed to distribute profits to their members. Similarly, companies limited by guarantee will usually have to reinvest profits in the company and community instead of distributing them to guarantors.
Liability

Setting up your enterprise as a limited company, a community interest company, an industrial and provident society, or a incorporated registered charity, will protect you from liability if your enterprise causes or suffers financial loss. An exception to this would be if you acted negligently or fraudulently – in these cases you would still be personally liable.

Shared ownership

If you’re happy to share ownership you might consider an industrial and provident society model (co-op) where each member has one vote. Another option would be the one that most UK social enterprises choose: a company limited by guarantee. If each member guarantees the same amount (which can be just £1) they normally have a vote each, which makes for an equal voting structure. To find out about setting up a co-op go to the Co-operatives UK website.

Concentrated ownership

If your aim is to keep ownership and control you might want to set up a company limited by shares. The more shares you have, the more control you have. Companies like this normally distribute profits to the owners via dividends. However, many grant making bodies may not give to this type of company as they worry about their money profiting business owners instead of the community.

Funding

Decide what type of funding you will rely on in the long-term and choose an appropriate structure. For example, being a charity may open doors to donations and grants but your ability to raise money from trading may be limited (depending on what type of trading you want to do), and people won’t be able to buy shares in your enterprise.

Use of profits

The way you use your profits will be governed by your legal structure. For example, registered charities and some sorts of co-ops will usually reinvest profits in their business as they’re not allowed to distribute profits to their members. Similarly, companies limited by guarantee will usually have to reinvest profits in the company and community instead of distributing them to guarantors.

How can I get funding to start fund a social enterprise?

Banks

High street banks are the biggest providers of funding to small and medium size businesses. Lenders will take into account factors such as general market conditions, your business plan, the extent to which the loan is secured against company assets or is guaranteed by a third party. Interest rates will be at normal commercial rates.

Others

There are a number of bodies that are used to funding social enterprises, including:

Grants

These have the big advantage of being non-repayable, but conditions are often imposed, e.g. some bodies will not lend to companies limited by shares, which have the potential to pay dividends.

Other considerations

Social enterprises can be viewed as risky by some potential funders, so whoever you approach, make sure you have a sound business plan that shows how:

  • Your enterprise is viable
  • You will invest profits back into the business and the community.