The advice I can give about the most suitable form of social enterprise is not legal advice, but advice about the economic and political environment for setting up a cause-driven business.
You may know that a social enterprise is a non-dividend distributing organisation which is run to address a social cause, but how you relate to it as a legal entity is a topic of considerable debate.
The traditional dichotomy of the social enterprise is the discrepancy between the social - societal consequences, and the enterprise, or business upshots, of the organisation. But in a deflationary economy and a frugal public expenditure regime I suggest that the most important distinction for a social enterprise is not, however, the dichotomy between private and voluntary organisations but between governmental and non-governmental.
Let’s consider your own organisation’s income - do you generate added economic value by creating a desirable condition for other people to exchange their earnings with you, for your product (or service), or do you redistribute the benefits of capital collected from all citizens who pay taxes to a subset of people?
If your organisation does the former, you are non-governmental. If your organisation does that the latter, as a social enterprise, you have taken on a trio of:
- Ethical business obligations to operate in the public interest
- Economic constraints to provide products which are not discretionary in government budgets, and
- Political responsibilities to conduct your organisation with transparency, efficiency and austerity.
As a young social entrepreneur, I currently trade on a self-employed (SE) basis. In the past decade, I have incorporated three companies limited by shares (CLS), as well as a community interest company (CIC) and a company limited by guarantee (CLG) which is now a registered charity in England & Wales.
Others have suggested that having a variety of legal forms in which to register a social enterprise is, in principal, negative. I do not believe that most of the problems are with the legal structures themselves, but rather with the social business advice surrounding their adoption by founders. At each juncture I would have valued additional knowledge to support my making an evidence-based decision on the most suitable legal structure. I have found it important to identify accountants who can demonstrate, through one or more case studies, the value of their advice to a local social enterprise.
It is not always financially practical during the early evaluation of legal structures for a startup social business to take this type of advice. A comparison table showing legal structures suitable for civil society organisations would be useful. Perhaps there is one you could recommend? To be most helpful, such a table would include key distinctions between the current legal forms of organisation under comparison. It would be useful if the social enterprise comparison provided indications of the respective regulators’ monitoring powers and support roles as well as upcoming options for new organisations. If this is what you are looking for, I can recommend the decision making tool from the National Council for Voluntary Organisations (NCVO) which is available on the Get Legal website.
Decision making tools aside, the most important thing is to decide what you are going to do, before you decide what type of legal form you are going to set-up. In my responsibilities as a venture philanthropist, and social enterprise funder, some of the questions I have asked of social enterprises are:
- What is the story behind your organisation?
- What is the most exciting part of your organisation’s ethos or product?
- What proof can you show me that you know your industry (rather than just telling me)?
- What will the financial position of your social enterprise be if you receive the income you are asking me for and if you don’t?
Answering these questions should help you focus on what you will do and what your targeted outcomes are, beyond survival, which must include a sound financial strategy, beyond what type of legal entity you will have.
In terms of which legal structure is right for you and your team, I think there are two established models for setting up a social enterprise in the UK today, which can be combined to allow you to seek profit and donations, pay dividends and collect gift aid.
First ask yourself: “How will I trade?” Your main consideration could be about who you trade with and what type of contract you will use. Secondly, ask yourself: “How will I raise finance for growth?”.
If your answer to these two questions is: (i) selling products/services to customers, (ii) investing capital in return for a share of the outcomes, I would recommend registering a company limited by shares (CLS), which is the typical structure for a UK Company. In this situation you are accepting that ‘the customer is always right’, rather than being sometimes right except…when donors think they are wrong! It’s about not splitting interests. With this approach, business investors typically expect capital to generate a return on investment through shares.
If your answer to the previous two questions is: (i) giving products/services, (ii) fundraising through supporters’ grants and donations, I would recommend registering a company limited by guarantee (CLG) and seeking registration with the Charity Commission. This is because funders of organisations looking to raise finance via voluntary income most often demand a structure which locks the value into the pursuit of defined social outcomes.
The catch, if there is one, is you can’t walk both paths at once - I suggest that you really should choose to either put society before profit, or profit before society, when you start a social enterprise. It is worth remembering that Charity law and Company law have had hundreds of years to become established in the public consciousness. Therefore, a ‘profit for purpose’, social enterprise approach is most easily explained and operated where the social entrepreneurs are operating a business first and a social campaign second. In this respect, I suggest that social enterprises give priority to the customer, adopting the customer service mind-set, over the promotion of philanthropic activities which seek to reproduce the interests of donors.
I would add a reminder that the majority of funds available for social enterprises come in the form of grants for less than five thousand pounds. The focus of a social enterprise should be on the available sources of funding. This does not mean that you need to sacrifice flexibility to accommodate a change in focus at a later stage, from customer to donor, or vice versa, over the organisation’s lifespan. I said that I think there are two sound legal structures for setting up a social enterprise in the UK today, which can be combined to allow you to seek profit and donations, pay dividends and collect gift aid. This is not possible with either of these legal structures, but with a combination of both.
If your organisation’s brand (the legal ‘personality’ of your organisation) seeks to change or divide its focus in order to thrive, I recommend that you then set-up the other half of the structure. If you decided, firstly, to incorporate a company limited by guarantee (CLG) as a registered Charity, you may now set-up your trading arm. The trading arm can be incorporated as a company limited by shares (CLS) as a wholly owned subsidiary of the Charity. If you decided to establish a company limited by shares first, then now you can set-up the company limited by guarantee, register it as a Charity and sign your organisation’s shares over to it.
You could think of this approach as creating two purebreds, or specialised tools, each most suitable for their purpose. This helps prevent conflicting interests, which can appear as if you are singing ‘One Song to the Tune of Another’. This avoids what others have referred to as ‘twisting the rules’ to shoehorn charitable objectives into the Company model, or profit generating objectives into the Charity model.
Perhaps if it were simpler to takeover a social enterprise when they are failing or dormant, then the cost of setting up a social enterprise up might also be reduced. Perhaps the sector is in need of greater emphasis on transfer of ownership and local coalitions which support existing social enterprises and social entrepreneurs.
In terms of the evolution of social enterprise regulations, I believe in strong definitions of organisational structures, but a strong definition does not have to narrow the range of possible structures – the range of legal forms can be broad and clearly defined. Diversity is very desirable for the resilience of the UK definition of social enterprise in terms of public trust and the reputation of the collective mark.
Which ever you decide on as the most suitable form of social enterprise in terms of legal structure, your focus might be best directed towards your sources of funding in the economic and political environment when setting up a cause-driven business in 2011. @davidpidsley
On reading the comments on this topic at The Guardian Social Enterprise Network, I was reminded of how unhelpful acronyms can be when trying to understand and take part in a specialist discussion. I reminded myself that it is important to define acronyms before using them within each comment even if others before you have done so.
It is a shame that The Guardian was not able to get participation in the discussion from the Charity Commission, particularly to discuss Charitable Incorporated Organisations (CIO) as many existing organisations such as Community Interest Companies, will be able to convert directly into either a charitable company or a CIO. Existing corporate bodies will be re-registered as a CIOs and the conversion process will not affect the legal personality of the organisation or its business relationships.