Set up a social enterprise

A social enterprise is a business with primarily social objectives whose surpluses are principally reinvested for that purpose in the business or in the community, rather than being driven by the need to maximise profit for shareholders and owners.

Within this definition, social enterprises can take on a variety of legal forms, including:

• unincorporated associations
• trusts
• limited companies
• some industrial and provident societies such as community benefit societies
• Community Interest Companies
• charitable incorporated organisations

A social enterprise should also consider whether or not to set itself up as a charity. Doing so offers a number of benefits, including significant tax reliefs, but results in increased regulation and less flexibility.

It is what a business does with its profits that determines whether it is a social enterprise, rather than its specific legal structure.

However, you should carefully consider the various options to ensure that you choose the legal structure that most suits your social enterprise in terms of management style and mission. Although professional advice is not always necessary, it is a good idea to seek the opinion of an expert before coming to a decision.

This guide outlines the differences between these legal forms.

---

Unincorporated associations

The unincorporated association form is usually chosen when a number of individuals agree or ‘contract’ to come together for a common purpose – which may be of a social nature.

How unincorporated associations operate

Unincorporated associations are relatively straightforward to run and cost nothing to set up. They make their own rules for running the organisation and set these down in a democratic constitution. A management committee is elected to run the organisation on behalf of the members (if it has any).

Unincorporated associations do not need to register with or be regulated by either Companies House or the Financial Services Authority. They enjoy greater freedom of operation than a company. For example, they don’t have to submit annual returns.

If an unincorporated association’s objects are exclusively charitable and those objects are for the public benefit, the association should apply to the Charity Commission to be registered as a charity. All charities must follow the requirements of charity law, and most registered charities must also submit annual returns to the Charity Commission. Read frequently asked questions on registering a charity on the Charity Commission website- Opens in a new window.

Unincorporated associations may also have trading or business objectives or carry on commercial activities.

Although an unincorporated association cannot own property, it may be able to set up a trust to legally hold property and assets for the community they are intended to benefit. See the page in this guide on trusts.

Unincorporated associations and personal risk

Unincorporated associations have no separate legal identity. This means that their members will have to sign loans and contracts as individuals and carry the risk of personal liability.

This form is unlikely to offer a long-term solution if you intend to sign contracts or expand the enterprise. You should consider incorporation if you intend to:

• take on employees
• raise finance, apply for grants or open bank accounts
• issue shares
• enter into large contracts
• take on a lease or buy freehold property

This should help you to gain access to a wide range of financing sources that will not put your personal assets at risk.

Read about good governance and leadership on the National Council for Voluntary Organisations (NCVO) website- Opens in a new window.

---

Trusts

A trust is a legal device which governs how assets given by an individual or organisation are to be used. Many organisations, such as those involved in education, healthcare, providing advice and conservation, can be structured as trusts.

How trusts work

Trusts are unincorporated bodies and do not distribute their profits. They’re managed by trustees. Trustees do not benefit from the trust, but act on behalf of the community for whose benefit the trust is set up. Trusts make their own governing rules and have no legal identity of their own.

Trusts have a trust deed which protects their social objectives. This covers the terms under which an individual or organisation is given assets. It also lists the intended beneficiaries and the conditions under which the trust’s assets may be used.

As trusts can hold property and other assets for the community, they can act as sister bodies to unincorporated associations. See the page in this guide on unincorporated associations.

Trusts are relatively straightforward and cost-effective to set up. As they have no separate legal identity, the trustees are personally liable for the trust’s liabilities. You should seek legal advice on whether you need to register the trust’s name with Companies House.

Asset locks

Trusts may write an asset lock into their rules to secure assets for their intended community. Some other social enterprises can also do this. See the pages in this guide on Community Interest Companies, community benefit societies and charitable incorporated organisations.

Charitable trusts

If a trust’s aims are exclusively charitable and those aims are for the public benefit, the trust should (in most cases) apply to the Charity Commission to be registered as a charity. Read about registering as a charity on the Charity Commission website- Opens in a new window.

Development trusts

Development trusts are community owned and led organisations, and do not distribute any profits. They provide a hub of trade or service with the aim of regenerating their local community – eg to develop or manage property, restore buildings or improve the environment.

There is no standard legal form for a development trust. Most register as a company limited by guarantee and in a few cases as an industrial and provident society. Many register as charities. For the legal and financial issues, see the pages in this guide on limited companies with a social purpose and on community benefit societies.

---

Limited companies with a social purpose

The limited company is an organisational structure which gives limited liability to its members. Some social enterprises take on the form of a limited company. This is a more accountable form than, for example, an unincorporated association.

Limited companies may have an ‘objects’ clause that sets out the company’s aims or purposes. Although these objects can be commercial, if your business is a social enterprise, they must also relate to social and/or environmental objectives such as regenerating an area or providing employment and/or training for people disadvantaged in the labour market. Social enterprises that are registered charities must only have objects that the law defines as charitable, such as relieving financial hardship or promoting education.

Types of limited company

There are two incorporated forms to choose between when setting up a social enterprise as a limited company:

• Company limited by shares (CLS) – shareholders each hold shares in the company. Their liability is limited to the amount unpaid on shares they hold. A public limited company (plc) differs from a CLS in that its shares can be sold to the general public.
• Company limited by guarantee (CLG) – each of the members gives a guarantee for a certain sum that will be put towards the company’s finances if the company is wound up. A CLG cannot raise finance by issuing shares, nor pay dividends to its members.

The issues are complex and you should seek professional advice. See our guide on how to set up and register a limited company (private or public).

Limited company registration and costs

All limited companies – including Community Interest Companies (CICs) – must register (incorporate) and file annual returns at Companies House. Limited companies must also submit a set of memoranda and articles of association. A standard incorporation certificate costs £20.

There is a fee for incorporating your company with Companies House. The fee varies depending on:

• whether you submit the necessary documentation as hard copies or electronically
• whether or not you want to incorporate on the same day that you submit the documentation

Find a full list of Companies House fees on the Companies House website- Opens in a new window.

Limited companies, with the exception of CICs, can also be set up as charities if the organisation has exclusively charitable objects and is for the public benefit, and should (in most cases) apply to the Charity Commission to be registered as a charity. However, it is very rare for a CLS to be a charity. See the pages in this guide on social enterprises as registered charities and on Community Interest Companies.

---

Community benefit societies

Community benefit societies (BenComs) are incorporated industrial and provident societies (IPS) that conduct business for the benefit of their community. Profits are not distributed among members, or external shareholders, but returned to the community. For example, a nursery school might use this form to let staff take part in decision-making.

How BenComs operate

As IPS, some key characteristics of BenComs are as follows:

• They are set up with social objectives to conduct a business or trade.
• They are run and managed by their members.
• They must submit annual accounts.
• They can raise funds by issuing shares to the public.
• They can be established as charities, providing they have exclusively charitable objects that are for the public benefit, allowing them to raise capital through public grants and charitable trusts. If approved, they’re known as exempt charities – reporting to the Financial Services Authority (FSA), not the Charity Commission. Read about exempt charities on the Charity Commission website- Opens in a new window.

BenComs are not to be confused with another form of IPS – co-operatives. Co-operatives operate for the mutual benefit of their members and may or may not be a social enterprise, depending on their activities and how they distribute their profits. Co-operatives cannot be established as charities. Read information on IPS on the FSA website- Opens in a new window. BenComs and co-operatives are both regulated by the FSA. Download information on BenComs and their registration [opens in a new window].

BenCom registration and costs

To register as a BenCom, you must demonstrate your social objectives and your reasons for registering as a society, rather than a company.

It can cost between £40 and £950 to register a BenCom with the FSA – payable each year. The fee depends on the BenCom’s assets and whether it registers under self-written rules or FSA-approved rules. Download information on application fees [opens in a new window].

You should seek legal advice, particularly if creating your own rules.

Adopting or opting out of the BenCom structure

A registered company may, by special resolution and under certain circumstances, convert into a registered society. Conversely, members can vote to change the objectives of an IPS and convert it into a company.

Asset locks

Charitable BenComs must have an asset lock. Non-charitable BenComs can apply an asset lock, which protects their assets for the future benefit of the community. BenComs that do so may only convert to a Community Interest Company (CIC). See the page in this guide on Community Interest Companies.

---

Social enterprises as registered charities

Many social enterprises have charitable status. It is only possible to gain this status if the purposes of your organisation are exclusively charitable and are for the public benefit. Charitable purposes include advancing education or religion, and relieving financial hardship. Over many years, a host of other charitable purposes that benefit the community have been recognised as charitable by the courts or the Charity Commission.

Organisational restrictions on charitable social enterprises

• A charitable social enterprise must have exclusively charitable purposes, and those purposes must be for the public benefit.
• The directors or trustees are responsible for administration and management and generally must not be paid for this work. However, charities can pay trustees (including the director) for providing goods and non-trustee or employee services to the charity. A range of safeguards are in place to prevent conflicts of interest or abuse.
• Any profits or surpluses made by the organisation must be invested back into it and used to support its charitable purposes. Any profit or surplus must not be paid out to members of the charity.
• Assets must always be used for the charitable purposes of the organisation.

Read about trustee expenses and payments on the Charity Commission website- Opens in a new window.

Read a guide to registering as a charity on the Charity Commission website- Opens in a new window.

Read about the Charities Act 2006 on the Charity Commission website- Opens in a new window.

Incorporated charities

Most charities that seek the benefits of incorporation currently incorporate as a company limited by guarantee. A new incorporated legal form designed exclusively for charities is being developed, called the charitable incorporated organisation (CIO). See the page in this guide on charitable incorporated organisations.

Read about incorporating a charity on the Charity Commission website- Opens in a new window.

---

Community Interest Companies

Community Interest Companies (CICs) are limited companies that exist to provide benefits to a community, or a specific section of a community. The CIC has the flexibility of the familiar company form, and access to a range of financing options, so may be appropriate for those working for a social purpose.

Its key features include an asset lock and a community interest statement.

Setting up a CIC

Registering as a CIC is a single process.  When you register you choose to be a company limited by share or a company limited by guarantee. CICs must comply with the CIC Regulations and Company Law. See the page in this guide on limited companies with a social purpose.

When registering your company with Companies House, you will need to provide additional documents, including a community interest statement describing your social purpose. The CIC Regulator will approve your application if your statement passes the community interest test – ie the business activities you intend to undertake will be carried out for the benefit of the community or a section of it, or that the CIC’s purpose is in the community’s or wider public’s interest.

Read guidance on how to form a CIC on the Community Interest Companies website- Opens in a new window.

CICs shouldn’t be confused with charities. CICs cannot have charitable status but a charity can set up a CIC subsidiary company. This means they do not get the tax benefits of a charity, but in return they do not have the strict reporting requirements of a charity.

See the page in this guide on social enterprises as registered charities.

How CICs operate

CICs have to follow specific rules, including the following:

• CICs must have an asset lock. This means that the company cannot generally transfer its profits or assets for less than their full market value except as permitted by regulation. It will also protect any remaining assets for the community if you dissolve the CIC.
• If you set up your CIC as a company limited by shares, you’ll have the option of issuing shares that pay a capped dividend to investors. The cap is set by the CIC Regulator to protect the asset lock.
• Together with your annual accounts, you must present an annual community interest company report for public record. The report must show what the CIC has done during the year to pursue its pre-specified community interest and involve the individuals or groups with a particular interest in the CIC.
• Certain voting rights changed on 1 October 2009. A CIC’s chairperson no longer has the right to have a second or casting vote at a board meeting when the votes are equally divided. An alternate director can no longer – in the absence of their appointer – have a separate vote on behalf of their appointer as well as their own vote.

Find details of what fees you will need to pay to register as a CIC on the Companies House website.

---

Charitable incorporated organisations

The new legal structure known as the charitable incorporated organisation (CIO) will be available to new organisations and existing charities that wish to convert into the CIO form.

Converting to a CIO 

Under certain conditions, the following organisations may be able to apply for conversion to a CIO through a special conversion process:

• an existing company which is registered as a charity
• a community interest company

In future a conversion process may be established for charities which are regulated industrial and provident societies.

Other forms of charity will be able to convert into a CIO by setting up a new CIO, transferring the charity’s assets to it, and then winding up the old charity.

Exempt charities and companies or regulated societies with a share capital – where any of the shares are not fully paid up – will not be able to apply for conversion to a CIO. Read about exempt charities on the Charity Commission website- Opens in a new window. 

Special features of CIOs 

CIOs will differ from other charity forms in the following ways:

• Although CIOs will not use company terminology – directors will be called charity trustees – they will be more like company forms than other types of charity forms.
• As CIOs are always incorporated, they will be separate legal entities and their members will have either no liability or limited liability.
• CIOs – like Community Interest Companies and community benefit societies – will have their assets locked in for their charitable purposes. They will not be able to distribute profits or assets to their members. See the pages in this guide on Community Interest Companies and community benefit societies.
• Unlike some of the other forms used by charities, CIOs will only register with and report to the Charity Commission, not to Companies House or the Financial Services Authority.
• A choice of formats and administration will be available to suit organisations of all sizes, with or without a membership structure.

---

Here’s how being a social enterprise works for our business

Swamp Circus is the longest-running contemporary circus in the UK, promoting the art of circus performance through highly original entertainment, training, education and community regeneration projects. Founded in Sheffield in 1986, the business has always had strong charitable and environmental links. Becoming a charitable trust (Swamp Circus Trust) in 1993 helped the company to take its community work to new levels. Development Officer Tim Woolliscroft explains.

WHAT I DID

Get plenty of advice

“Swamp Circus Trust uses circus skills in a variety of projects that benefit individuals and communities in the South Yorkshire area. That could be anything from confidence-building workshops in schools, to live shows that tackle community themes. The business also has a strong commercial side, providing high quality circus-based entertainment and team-building events to the corporate market. The two sides of the business co-existed for several years when we decided we wanted to do more.

“We got advice from several sources, about how we could set up a more appropriate legal structure. The main criteria was that we wanted to be able to pursue more funding opportunities, such as grants – many of which are easier to apply for and get if you have charitable status. That, and the fact that we were already engaged in charitable work, led us to incorporate as a charitable trust, which we did with the help of legal advisers.”

Operate as a business

“While a social enterprise has built-in differences compared with a traditional company, it still needs to operate as a business. The process of becoming a charitable trust helped us to put business structures in place. For example, we had to write business plans, plus a company constitution outlining our guiding principles and goals. We also had to appoint trustees, which is a valuable exercise because it makes you think about where the skills gaps are in running your company, then gives you the opportunity to fill them.

“Preparing a business plan also made us focus on the sources of finance available. Setting up as a charitable trust can limit the options for traditional bank finance, partly because the legal structure means that trustees may be personally liable for debts, which can make them more cautious about loans. So we’ve had to be flexible and creative, exploring as many financing options as possible and adapting ourselves as we go.

We now operate using a mixture of grants plus the income we generate from our commercial clients. Both have increased over the years as a result of careful planning. We have also developed strong partnerships with a number of organisations in our area, which is invaluable for exchanging funding ideas.”

Reinvest wisely

“Swamp Circus Trust is a non-profit company, which means that once we’ve covered our core costs, any profit is reinvested straight back into the business. We’ve found from experience that being non-profit helps with funding opportunities.

“It would be tempting to pour all our profits directly into the community projects we run and into starting new ones, since we always have fresh ideas waiting in the wings! However, we are careful to invest in the business infrastructure as well, things like premises, equipment and marketing. Without covering these costs we cannot develop new projects so it’s a false economy to ignore that side of things.”

WHAT I’D DO DIFFERENTLY

Use charitable status for marketing purposes

“When we set up as a charitable trust, we didn’t make much of a fanfare about it and in retrospect we probably should have done. It’s only recently that we’ve started actively publicising our status and using it more creatively as a marketing tool. Our clients do cite our community work as an incentive to employ us, but we’re careful not to make that the only reason. We want to be judged on the quality of our service as well.”

Employ people who share the passion

“As a social enterprise grows, you sometimes need to take on people with commercial experience, but it’s ultimately frustrating if they don’t also share the original vision and sense of excitement. It takes a certain type of person to make a success of a social enterprise and after one or two early mistakes, we’re a lot more choosy these days about who we employ.”