Thinking about setting up a Social Enterprise or newly established?
Key points to think about
Legal Structure – There are several different legal structures available, and it is so important to ensure that you choose the right one for your organisation. When considering your options, it is key to consider the type of income, finance or funding you plan to have. Information on the main not-for-profit legal structures can be found on the COBRA factsheet. Click here
Options available include:
Constituted Group – This is an informal group which has a list of written rules and guidelines (known as a constitution). The groups are made up of volunteers who have come together for a common purpose or project, also known as community groups or unincorporated associations. Moving from a small group to a constituted group enables the group to apply for funding, enter into legal agreements along with setting out roles and responsibilities within the group. Further information can be found here
Community Interest Company (CIC) – This structure requires the organisation to have a community benefit, and an asset lock which prevents assets being sold at undervalue and requires that the CIC uses these assets for its designated community benefit. CICs have to report annually on how they have delivered their community benefit. The entrepreneur can receive a wage through the CIC and has control over the decision maker as they are the Director of the CIC.
Further information on setting up a CIC can be found in the COBRA factsheet here
for more in-depth detail and how to complete your application can be found on the government website: https://www.gov.uk/government/publications/community-interest-companies-business-activities
Charity – Unincorporated charities have a constitution which sets out its objectives and how it will operate. If anything goes wrong the trustees are personally liable.
Charities must register with the Charity Commission and Companies House; annual returns and accounts must be filed. If income is below £5,000 charities can apply to HMRC for recognition as a charity for tax purposes. Governance for charities is more restrictive than other legal structures. Further information on setting up a charity can be found on the government website: https://www.gov.uk/setting-up-charity and on the COBRA factsheet here there is also information and support for existing charities: https://www.gov.uk/guidance/charity-purposes-and-rules?utm_source=DSA&utm_medium=link&utm_campaign=5minguides&utm_id=sep23
Charitable Incorporated Organisation (CIO) – This legal structure gives the organisation all of the benefits of a charitable company but without the requirement to register with Companies House meaning that all of the filing and monitoring is carried out by the Charity Commission and the CIO is subject to Charity Law and not Company Law. Further information on setting up a CIO can be found in the COBRA factsheet here
Community Benefit Society (CBS) – This type of structure is set up to benefit the community and in the same way as a CIC has an asset lock to protect the assets. A CBS should trade or run a business for the benefit of the community and members own shares in the CBS. Shares can’t be sold or transferred to another person but would be given back to the CBS at the same price that it was purchased for. Members do not receive a share of the profits.
Charitable Community Benefit Society (CCBS) – This is a Community Benefit Society (CBS) that is also a charity. The CCBS must only operate and trade to achieve its charitable purposes and objects. It does not have to register with the Charity Commission but needs to apply to HMRC so that it is recognised as a charity for tax purposes. A CCBS must have an asset lock in place but can issue withdrawable shares to its members and pay interest on its shares.
Co-operative Society – The society is set up to serve the interest of its members; member participation and involvement are crucial. There isn’t a requirement to have an asset lock, but the Co-operative Society can have a voluntary asset lock in place. Dividends can be paid to its members based on their transactions with the Co-operative Society. It can be set up with any legal structure as long as it meets the principles and values included in the International Co-operative Alliance’s Statement on the Co-operative Identity, Values and Principles, more information can be found on their website: https://www.ica.coop/en/cooperatives/what-is-a-cooperative
Further information on choosing a charity legal structure can be found https://www.gov.uk/guidance/charity-types-how-to-choose-a-structure
Other for-profit structures that you may consider:
Sole Trader – Self-employed, you are the business and there isn’t a separate legal entity so if the organisation is sued, that means that you as an individual are liable. This type of structure will also exclude you from applying for grants and funding from sources such as The National Lottery for example.
Partnership – Not usually used in social enterprises but you could choose this structure where two individuals or organisations wish to work together. A Limited Liability Partnership provides the partnership with a separate legal entity, so the two individuals cannot be sued. Partnerships are not usually eligible to apply for grants and funding from sources such as The National Lottery for example.
Limited Company – The company could be limited by shares or by guarantee. Most large voluntary organisations that are not charitable companies are limited by guarantee, this means that they will have a Board and members, but they don’t have shares or shareholders. Legally companies have to register with the Charity Commission once your income is above £5,000 and you have charitable aims. Again, this type of organisation usually excludes you from applying for grants and funding.
Most commercial companies are limited by share and this structure would not be suitable for a Social Enterprise.
Research the different types of legal structure
Look at the financial and tax benefits of each structure, along with the governance requirements. If you are wanting to access grants and funding, you will need to choose an organisational structure that puts the community at the heart of what you do and is for their benefit – that’s not to say that you can’t earn a salary in the process
Choose a structure that will still be suitable for you in 3-, 5- and 10 years’ time
Once you have chosen your structure you will need to consider the roles and responsibilities which could include:
Chair – Provides leadership to the organisation and the board, chairing of meetings, being the groups representative and spokesperson. Further details on the duties and qualities required can be found here
Secretary – The role involves preparing agendas, arranging meetings and taking minutes. Further details on the duties and qualities required can be found here
Treasurer – The role involves the overseeing, approving and presenting budgets and accounts, preparing financial reports, monitoring investments. Further details on the duties and qualities required can be found here
Trustee – The role of the trustee is to ensure that the organisation pursues its stated purposes, which are set out in its governing document, that all governance is being correctly followed and ensuring financial security. Further details on the duties and qualities required can be found here
Further help can be found:
Charity Commission: https://www.gov.uk/government/organisations/charity-commission
Companies House: https://www.gov.uk/government/organisations/companies-house
CBS & Co-operatives: https://www.fca.org.uk/firms/mutual-societies
Co-operatives UK: https://www.uk.coop/
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