If you are thinking about starting a social enterprise but not sure of the correct legal status to adopt, we hope that this article will help you understand the advantagaes and disadvantages of your available options.
Starting a not-for-profit business in the UK involves a series of steps and decisions. The primary aim of a not-for-profit is to serve the public or a specific community, rather than to generate profit for its owners or shareholders.
Types of Not-for-Profit Organisations in the UK
- Charitable Incorporated Organisation (CIO)
- Company Limited by Guarantee (CLG)
- Community Interest Company (CIC)
- Charitable Trust
- Unincorporated Association
1. Charitable Incorporated Organisation (CIO)
A Charitable Incorporated Organisation (CIO) is a type of charity established in the UK that offers the benefits of incorporation without the need to register as a company. This structure provides the charity with its own legal identity, enabling it to enter into contracts and own property in its own name, while offering limited liability to its trustees. This means that the trustees are protected from personal liability for the charity’s debts, provided they act within their authority and comply with their duties. CIOs are regulated by the
Charity Commission and must exclusively pursue charitable purposes, ensuring transparency and accountability in their operations.
Advantages:
- Legal Protection: Provides limited liability to trustees, meaning their personal assets are protected if the organisation encounters financial difficulties.
- Simplicity: Only needs to register with the Charity Commission, not Companies House
- Charitable Status: Eligible for tax reliefs and exemptions available to charities.
Disadvantages:
- Regulatory Oversight: Must comply with the regulations and reporting requirements of the Charity Commission.
- Restricted Activities: Must exclusively pursue charitable purposes.
2. Company Limited by Guarantee (CLG)
A Company Limited by Guarantee (CLG) is a type of company structure commonly used by non-profit organisations, including charities, clubs, and associations. Unlike traditional companies that issue shares, a CLG has members who act as guarantors, agreeing to pay a nominal amount towards the company's debts if it winds up. This structure provides limited liability protection to its members and offers the flexibility to operate for various non-profit purposes. CLGs must register with
Companies House and, if they aim to achieve charitable status, also with the Charity Commission, necessitating compliance with both company and charity law, which can increase administrative duties.
Advantages:
- Legal Protection: Offers limited liability to its members.
- Flexibility: Can operate for non-charitable purposes and still not distribute profits.
- Credibility: Often perceived as more credible by funders and partners.
Disadvantages:
- Dual Regulation: Must register with both Companies House and the Charity Commission if it seeks charitable status.
- Administrative Burden: Requires compliance with both company and charity law, increasing administrative tasks.
3. Community Interest Company (CIC)
A Community Interest Company (CIC) is a special type of limited company designed for social enterprises that want to use their profits and assets for the public good. CICs can be limited by shares or by guarantee and must pass a community interest test to ensure their activities benefit the community. This structure includes an asset lock, ensuring that the company’s assets are used for its social objectives and are not distributed to shareholders or members beyond a reasonable level. CICs are regulated by the
CIC Regulator and Companies House, offering a balance between operating as a business and fulfilling a social mission, although they do not receive the same tax benefits as charities.
Advantages:
- Social Enterprise Focus: Specifically designed for social enterprises, combining business methods with social goals.
- Asset Lock: Ensures that the company’s assets are used for the community’s benefit.
- Flexible Structure: Can be limited by shares or by guarantee.
Disadvantages:
- Regulation: Subject to oversight by the CIC Regulator and Companies House.
- Limited Tax Benefits: Does not receive the same tax advantages as charities.
4. Charitable Trust
A Charitable Trust is a legal structure designed to manage and allocate funds or assets for charitable purposes. It is established by a trust deed and managed by trustees who are responsible for ensuring that the trust’s resources are used in accordance with its charitable objectives. Charitable trusts are particularly suited for organisations that focus on granting funds to support other charitable activities rather than running services directly. Trustees do not have limited liability, meaning they can be personally liable for the trust’s debts. Charitable trusts must register with the Charity Commission if they meet the registration threshold and must comply with its regulations and reporting requirements.
Advantages:
- Asset Management: Ideal for managing and distributing funds or assets for charitable purposes.
- Simpler Structure: Generally simpler to set up and manage compared to other forms.
Disadvantages:
- Personal Liability: Trustees do not have limited liability, which means they could be personally liable for debts.
- Less Suitable for Trading: Not ideal for organisations that intend to engage in trading activities.
5. Unincorporated Association
An Unincorporated Association is an informal, flexible type of organisation commonly used by small community groups, clubs, and societies. It does not have its own legal identity, meaning it cannot enter into contracts or own property in its own name; instead, its members are personally liable for the association’s debts and obligations. This structure is easy and inexpensive to set up, with minimal regulatory requirements, making it ideal for small, volunteer-run groups. However, the lack of limited liability and legal status can pose risks, particularly if the association undertakes significant activities or financial transactions. Unincorporated associations can apply for charitable status if they meet the criteria set by the Charity Commission.
Advantages:
- Ease of Formation: Simple and inexpensive to set up without needing to register with Companies House or the Charity Commission.
- Flexibility: Suitable for small, community-based groups with minimal administrative requirements.
Disadvantages:
- No Legal Status: Cannot enter into contracts or own property in its own name.
- Personal Liability: Members may be personally liable for the organisation’s debts.
Steps to Start a Not-for-Profit Business
- Define Your Purpose and Mission: Clearly articulate the purpose of your organisation and the public benefit it will provide.
- Choose the Appropriate Structure: Select the most suitable type of not-for-profit based on your goals, activities, and the level of liability protection needed.
- Create a Governing Document: Draft a constitution, trust deed, or articles of association, depending on the structure chosen.
- Register Your Organisation: Register with the appropriate regulatory bodies (e.g., Charity Commission, Companies House, CIC Regulator) based on your chosen structure.
- Comply with Legal and Reporting Requirements: Ensure compliance with ongoing regulatory requirements, including annual reports, accounts, and returns.
- Fundraising and Revenue Generation: Develop strategies for fundraising, applying for grants, and generating revenue while adhering to the rules governing not-for-profits.
- Governance and Management: Establish a board of trustees or directors to oversee the organisation’s activities and ensure good governance.
Starting a not-for-profit business involves careful planning and consideration of various legal structures, each with its own advantages and disadvantages. By choosing the right structure and complying with regulatory requirements, you can effectively establish and run a not-for-profit organisation that serves your intended community or cause. You can find out more at:
'How to set up a social enterprise' (on Gov.UK).
Andy
