Do you know your IPS from your CIC?
Pioneers Post, by Lee Mannion
Co-operative, charity, community interest company limited by guarantee or by shares? What legal form should your social enterprise be? Help is at hand in the shape of Inspire2Enterprise’s Myles Cooper.
Having the brainwave and starting the work that supports your social mission is just the start. Once you've written a business plan and your social enterprise turns from idea to reality, there’s some necessary paperwork that needs dealing with and for that, you’ll need some legal advice. Does it really matter how you structure your social venture?
Yes, says Myles Cooper. According to how you set yourself up, you could be personally liable for any debts should things not go well. If you think you might need financial support, then certain legal structures could make your venture more attractive to funders, investors and other stakeholders. To help you find your way through the legal maze, we fired some questions at Myles – a non-practicing solicitor and specialist advisor with Inspire2Enterprise.
How do I decide on the legal structure of my social business?
Assuming one doesn't already exist, in the first instance we will work with you through a business planning process, in order to identify where your funding is going to come from, what you are going to do with any profit and how much control you want to retain over your social business.
The ability to trade without restrictions is very different whether you go along the charitable or non-charitable route. The ability to distribute profits through dividends is also different, not only depending on your charitable status but also on which type of community interest company (CIC) you choose.
OK, so I have a business plan. What next?
If you are going to be relying on grant funding, we would advise thinking about charitable organisation structures as these often open a lot more doors in this respect. If your income is primarily going to come from trading and you have an underlying social purpose, that would probably indicate a community interest company (CIC) as a more appropriate option as this would enable you to act like any other company more or less, paying directors expenses and a remuneration. Deciding on where the money is coming from will indicate which particular structure is appropriate for your business.
Our money is going to come from grant funding. Is there any reason not to adopt charitable status, in particular if those running it need to earn a livelihood?
Whichever charitable route you take (and there are a number of them) there are severe restrictions on paying trustees. If you are a trustee (i.e. in care and control of a charitable organisation), you don’t get paid unless there is a very good reason for doing so. The presumption is that trustees are working on a voluntary basis.
If you are the founder of a social venture that subsequently adopts charitable status, you would have to hand control over to a board of trustees who will then make all the decisions. You would then be an employee of that charity, so you are relinquishing control.
How might I be affected by regulation?
If you want to take advantage of the various tax breaks that are available to charities, you are submitting to tighter regulation than the light touch regulation of a CIC. If you consider the community benefit society (CBS - see below) option for your social enterprise, you are governed by the Financial Conduct Authority.
Depending on which option you choose there will be a different scheme of regulation. Alternatively, if your business is not incorporated at all, you’re not regulated at all. However, you will be liable for any losses if things don’t go well.
Supposing we are going to make our money by trading: how do we choose between setting up as a community interest company limited by guarantee or by shares?
This largely comes down to the funding question. If a CIC is going to be reliant on grants it’s true to say there are more grants available for CICs by guarantee than there are by shares.
If your business plan is to attract equity investment and you're set up as a company limited by guarantee you’ve got nothing (i.e. no shares) to actually offer the potential investor.
If you’re not seeking any equity investment then you will most likely choose the CIC limited by guarantee.
This structure still allows you to pay your directors by remuneration and expenses but it might limit your future investment opportunities.
I understand there are several different forms of social enterprise. Apart from CICs, what are the others?
Legally, there is no such thing as a ‘social enterprise’ – that’s the umbrella term that covers a wide range of organisations – in addition to CICs, these also include standard companies limited by guarantee (with and without charitable status), and those labelled as an Industrial and Provident Society (IPS).
For IPS, think ‘mutual’ (i.e. mutual ownership) but be aware that there are two types of IPS; firstly there is the Community Benefit Society (CBS) model – as the name suggests, it must prove that it has a wider community benefit. The other kind is a standard co-operative – a society run by and for the benefit of its members. The difference between the two is that the former benefits people other than its members or shareholders. While a co-operative may also benefit others, it is only legally obliged to benefit its members, with profits reinvested so that the venture can grow. Members, however, can be a broad group of people, including both staff, customers and other groups.
Am I allowed to profit from my community interest company or co-operative?
Depends what you mean by profit. You’re allowed to earn a wage. If you mean that you want to take some of the surplus that is generated by the business, you can take some of that if your CIC is limited by shares. Towards the end of last year the restrictions to payment of dividends were removed. The basic restriction now is there is a 65/35 split. If there is a distributable profit that can be paid by way of dividend those private investors and shareholders can actually take 35% of that. Co-operatives are also allowed to distribute profits to shareholders.
Why has the government allowed shareholders to profit from social enterprises?
It was a way to further encourage private investment in social enterprise. Whilst it’s unlikely to ever be a 'Dragon's Den' type return, there is a social return nonetheless.
What if we have set up with charitable status – presumably we can’t profit from that?
Bigger charities do of course pay wages to their employees. So charities can still make money – generally this is called a 'surplus' rather than 'profit'. One thing to make clear though, is that the trustees cannot benefit from anything the charity owns. If a charity owns a property, the trustees cannot benefit from the selling of that. The assets stay with the charity.
What about CICs? Can owners or shareholders get their money back by selling assets if things don’t go well and the company is wound up?
With a CIC there is an 'asset lock'. In the event that a CIC is wound up, the assets must go to another nominated asset locked body or the regulator may make a decision about it.
Knowing whether an asset lock is part of the business is actually a good way to work out if the company is truly a social enterprise. When you’re looking at certain companies who might refer to themselves as such and there isn’t that asset lock, it begs the question, ‘Are you a social enterprise or are you planning to sell that company in ten years time and gain from it?’ Model legal articles for CICs state that they are not for private gain.
Would setting up as a social enterprise or adopting charitable status affect my social impact?
Ultimately how you go about delivering and measuring your social impact will be defined by what structure you have. A CIC with a given community purpose stated at the outset will have a different impact to the public benefit and exclusively charitable purpose that a charity performs.
Whichever structure you choose, measuring your social impact is fundamental to why you exist. You’re doing something that is achieving a social purpose.
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