Assuming that you know why you are setting up a charity or social enterprise, this post helps you navigate through the (many!) different options for legal structures to find the best one for you.
It can be overwhelming so we’ll try to cut through the jargon. Before we get into the detail you need to be clear on what kind of organisation you want to be.
Charity vs social enterprise - the basics
What is a charity?
Charities tend to be about raising money which is then put to good causes. The nature of charitable causes is such that they would be neglected if generous people did not step in. So the legal charity in the UK has developed to provide a mechanism to safeguard the donor's money when it is given to a good cause.
What is a social enterprise?
The idea of a ‘social enterprise’ as distinct from a company is quite new. We’ll discuss some of the interesting nuances below, but when people talk about social enterprises they are often talking about organisations that aim to make a social change (like charities) but fund this through trading rather than donations.
Of course, these broad definitions overlap. For example, charity shops involve trading with the public, though the goods they sell are typically donated. A ‘purer’ example of social enterprise might be selling goods that have been purchased and refurbished.
I’m starting out, should it be a charity or a social enterprise?
If you are thinking about setting up a charity or social enterprise, it can be complex to find the right legal structure. But it should be easy to decide in general terms whether you should be a charity or a social enterprise.
If you can imagine yourself going out on the street and shaking tins for your cause, or running a marathon to raise funds, then you should be a charity.
If you want to be self-sufficient and sell things, whether baked goods, trainers or consultancy, then you should be a social enterprise.
What is the right legal structure?
For charities, there are a few different legal structures to consider:
This is the most popular type of charity. You register a company limited by guarantee at Companies House and then you apply to the Charity Commission for charitable status. The first is easy and lots of websites will do this for you for a nominal fee. The second is much more challenging and you are likely to need professional help.
Charitable Unincorporated Association
As the name suggests, this is not a company. Rather it is a group of people acknowledged by law who have some kind of constitutional document. So it avoids the need for registration with Companies House but you must still apply to the Charity Commission for charitable status. The most likely situation for choosing this route is that you start life as an Unincorporated Association, such as a sports club or community group and later want to apply for charitable status.
Charitable Incorporated Organisation (CIO)
CIOs were new in 2013. The idea was to give a simpler route to setting up a charity that didn’t have the duplication of having to register with both Companies House and the Charity Commission. If you are starting from scratch this is a good option to consider.
A trust is a separate type of legal entity that is often used to hold money for a designated purpose. If this purpose is charitable then the trust can become a registered charity. Unless you already have a large amount of money and are wondering what to do with it, this is unlikely to be the best structure to start with.
For social enterprises there also a number of options available:
Limited Company (by shares)
This is the most popular type of legal structure for businesses. It’s a simple and flexible structure where the ownership of the company rests with the shareholders. There is nothing inherent in the structure of a limited company that means it has to be focused on profit or serve the interests of the shareholders at the expense of others. But this structure does not impose any particular ‘social’ aims or requirements on the operation of the company beyond the general good practice required by UK company law or the restrictions the shareholders may choose to voluntarily impose upon the company.
Community Interest Company (CIC)
CICs were introduced in 2005 to offer a more customised solution to the growing interest in social enterprise. The CIC aims to take the flexibility of a company and combine it with some built-in restrictions on the use of profits and assets. CICs have their own registrar who ensures that applicants meet the criteria for a CIC. They can’t become charities and don’t get any specific tax relief.
The two most notable practical features of a CIC are the asset lock and the dividend cap. The asset lock means that the assets of the company cannot be distributed outside of the company other than in accordance with the dividend cap. The dividend cap allows for the distribution of up to 35% of distributable profit each year.
While it is possible to enshrine social purpose and dividend limitations into the constitution of a normal company, CIC brings a more recognisable brand that quickly communicates the social focus of an organisation.
B Corporations (B Corp)
B (for ‘benefit’) Corporations are an import from the United States but have started to gain traction in the UK. They are not a distinct legal vehicle but rather B Corp is a certification framework that can be applied to traditional limited companies. The key requirement is that the company's founding constitution is amended to incorporate the purposes of the company as benefiting all stakeholders, not just shareholders. Read the B Corp declaration.
Summary of what to consider
As you think through the different options available, here is a checklist of considerations to bear in mind.
What social impact do you wish to achieve?
Clarity of purpose is fundamental.
Will you need voluntary donations to achieve this purpose?
If so think charity.
Do you expect to trade goods or services?
If so, this can be easier as a limited company or CIC.
Will trading be central to your social impact?
If so you sound like a social enterprise.
Do you need to raise capital and pay back investors?
If so, you may appreciate the flexibility of a limited company.
Do you anticipate applying for grants?
This will be easier if you are a charity but check the grant criteria.
Do you need a financial return?
Charities can pay fair market salaries. Be aware of the CIC asset lock.
Ultimately you may have to seek individual legal advice but for many new organisations, the correct path becomes clear after investigating the different legal structure and thinking through this list of considerations.