Legal Structures for Social Enterprises

1. Introduction

The term ‘Social Enterprise’ describes the purpose of a business, not its legal form. A social enterprise could take on a number of difference legal structures.

2. Community Interest Companies (CICs)

A Community Interest Company (CIC) is a form of company specifically created for the social enterprise sector. CIC’s are required by law to have provisions in their governing document, the Articles of Association, to set out their social purpose. They have an asset lock, which restricts the transfer of assets out of the CIC and ensures that they continue to be used for the benefit of the community. They also have a cap on the maximum dividend and interest payments they can make. A CIC structure provides a clear signal to investors/funders that the enterprise operates for the benefit of the community, and that this social purpose is protected by proportionate regulation.

In March 2019, a new online incorporation process for registering new CICs went live. This process is a three-way digital process including CIC, HMRC, and Companies House registration, enabling CICs to register for corporation tax as they incorporate their business.

A Community Interest Company (CIC) can be one of three company forms:

  • A private company limited by guarantee
  • A private company limited by shares
  • Or a public limited company

There are a number of model governing documents, such as a constitution for small membership, where the members are directors of the company. Alternatively, large membership where the membership is wider than just directors.

3. Community Benefit Society (CBS)

A Community Benefit Society (CBS) is a business that runs for the benefit of the wider community, re-investing profits in the community. This type of organisation has been popular with communities who want to take ownership of community assets such as pubs, and piers. It is appropriate for organisations wishing to raise capital from the public, as it has several special attributes such as democratic member control, withdrawable share capital, and asset lock.

Pre-tax trading profit can be reinvested in the enterprise, used to pay interest to shareholders, or distributed for social or charitable purpose in accordance with the rules.

In order to establish a CBS, you will need to register the society with the Financial Conduct Authority (FCA), with a set of rules. A sponsoring body provides model rules for a fee.

A CBS is one type of a registered society. A registered society can convert to a CIC, which involves a two-part process. The registered society converts first to an ‘ordinary’ company and then from an ‘ordinary’ company to a CIC.

4. Co-operative Society

A Co-operative Society is a business that is owned and controlled by its members, who can be customers, staff, suppliers, local residents or a combination of these stakeholders.

Members have an equal say in how the business is run. They also choose what to do with profits, whether distributing among members, reinvesting in the business or giving to the community. Shared ownership is central to a co-operative’s existence.

In order to establish a Co-operative Society, you will need to register the Society with the Financial Conduct Authority (FCA). As part of this process, you will need to fulfill certain conditions including evidence that control of the society lies with all members.

5. Private Company Limited by Guarantee without Share Capital (CLG)

A Private Company Limited by Guarantee (CLG) without share capital is a business whereby members benefit from limited liability and give a nominal guarantee to cover the company’s liability in the event of winding up. There is no share capital and there are no shareholders.

Do not confuse this structure with an Incorporated Charity. Read about these in Community Groups and Charity Structures.

In order to establish a CLG, you must register with Companies House. You will need to provide details such as a suitable company name, an address for the company, and written rules known as Memorandum and Articles of Association.

By embedding social purpose resolutions within the Memorandum and Articles of Association, adding an appropriate dissolution clause, and clearly defining the purpose, values, and impact of the organisation, it clearly distinguishes a social enterprise from a commercial organisation.

6. Private Company Limited by Shares (CLS)

A Private Company Limited by Shares is a business whereby shareholders put money into a company, and in return the company gives it a percentage of ownership, in the form of shares. The amount of ownership depends on how many shares you purchase in comparison with the other people, if any, who own shares in that company.

In order to establish a CLS, you must register with Companies House, in a similar manner to a CLG.

Registered Societies

Registered societies’ include:

  • Co-operative societies – businesses that run for the benefit of their members, distributing profits between their members
  • Community benefit societies – businesses that are run for the benefit of the wider community, re-investing profits in the community
  • Pre-commencement societies’ (industrial and provident societies, registered before 1 August 2014)

7. Trading arm of a charity

Some charities engage in trading as a way to raise funds or to further their objectives.
Charity law allows charities to trade provided that the trading falls into one of the following categories:

  • Primary purpose trading
  • Ancillary trading
  • Non-primary purpose trading that does not involve significant risk to the resources of the charity

Where trading (other than trading in pursuit of its charitable objects) involves significant risk to a charity’s assets, it must be undertaken by a trading subsidiary. In this instance, a charity would usually set up one of the legal entities previously discussed such as a Community Interest Company (CIC) or a Private Company Limited by Guarantee (CLG).

Any payment of income to a trustee is only likely to occur in exceptional circumstances and needs to be fully justified by trustee boards as being clearly in the interests of their charity.

Charity assets used directly for the purposes of the charity, and unpaid trusteeship has always been a distinctive feature of charitable activity.