Guidance worksheet

Summary of issues regarding establishment of trading arm 1. Rationale: Charitable organisations have limitations under existing regulations. DSD guidance illustrates; Charities enjoy tax and rating reliefs and can raise funds from the public, companies, statutory sources, and other charities. Charity trustees may seek the advice and assistance of the Department for Social Development, (see "The Department for Social Development"). Some purposes, however, are not charitable and cannot be carried out by a charity. They include: certain political, campaigning and pressure group activities; permanent trading*; and arrangements where the persons running the organisation benefit personally.

* i.e. non primary purpose trading so any activity must be related to the objects of the charity 1.1 Setting up a non charitable trading company Example: A Charitable Parent Company with two wholly owned subsidiaries

Charitable Company (Parent body)

Social Enterprise # 1 Wholly owned subsidiary

Social Enterprise # 2 Wholly owned subsidiary

Social Enterprise focuses on trading and commercial activity, generating profits to develop the business and contribute to the charitable aims of its sole member the charity

2. Available (and often preferred) structures 2.1 Company Limited by Guarantee (CLG) This is the most common form of incorporated structure used by the community and voluntary sector. Governed by a constitution (made up of Memorandum and Articles of Association) the key advantages and disadvantages are: CLG Advantages Profit: Establishing a trading arm will allow for any generated surplus/profit to be covenanted to the parent company/charity. Personal protection: The structure allows for personal liability for directors against the increased risk of trading which is not afforded by unincorporated organisations. Discipline: In splitting the charitable and commercial elements of the CLG Disadvantages Additional administrative burden As a separate legal entity and trading company, company returns are required. As are separate board minutes and audits. However, with good management this can be minimised by having meetings together and negotiating with auditors. Cost: There will of course be the cost of establishing a new trading company, approximate costs

The information in this worksheet is for guidance only and when considering the legal structure of your social enterprise, legal guidance should be sought. Work West 2012

Guidance worksheet
organisation the new trading arm will have a financial focus with the discipline of a business being encouraged. Increase skills base: As a trading company it is advised that individuals with more business focused skills are included to the board of the new company which may not be available (or sometimes deemed required) for the charitable body. Flexibility: There is power in the Companies (NI) Order 1986 to alter both the objects of a company and the regulations which govern administrative matters. A charitable company must ensure that no alteration is made to its memorandum or articles of association which would cause it to cease to be a charity at law Corporate identity: A company is, in the eyes of the law, like a person. It is therefore capable of owning property in its own name and of taking or defending actions in court. As it can own property, etc, in its own name, there is no need to appoint holding trustees to hold the property of the charity Continuity: Until it is wound up, a company has perpetual succession, i.e. it continues to exist, even though its members may change, die or cease to be involved in the activities of the company. While winding up the company is a complex business, it may be necessary if the purpose for which the company was originally formed is no longer applicable, or if the company becomes insolvent. range from 35 registration fee to a few hundred. Lack of privacy: There is a statutory requirement to inform the Registrar of Companies of any changes in directors. Company documents are available for public inspection. This is an advantage for organisations which desire to be open and accountable in their activities.

2.2 Community Interest Company Recent DETI information illustrates that CICs are designed specifically for those wishing to operate for the benefit of the community rather than for the benefit of the owners of the company. The special features of CICs make them particularly suitable for this purpose. A CIC may be a public company limited by shares, a private company limited by shares or a company limited by guarantee and will have the same benefits and obligations as other limited companies including registration in Companies Registry. Outlined below are some key advantages and disadvantages perceived with the model. CIC Advantages Clear ethical focus A CIC Statement must be provided guaranteeing the community and social aims of the company & a community interest test is essential. Limited personal liability Similar benefit to that seen in the Ltd by guarantee structure with personal liability for directors against the increased risk of trading. Separate legal entity CIC disadvantages New and untested (locally) There are few NI registered CICs and as such the model remains untested, however there have been many based in mainland UK that have developed since June 2005. It will take time for the brand of CICs to be recognised by funders and the public alike. Restrictions of the use of monies Surpluses must be used for the benefit of the

The information in this worksheet is for guidance only and when considering the legal structure of your social enterprise, legal guidance should be sought. Work West 2012

Guidance worksheet
This provides for a strong brand identity as a trading body, the key strength of the CIC structure. Access to alternative funding sources Investment finance becomes an option with a return on investment capped to help secure assets. This would require a share based set up but allows the company to maintain its social focus through the community interest test. Asset lock This lock on company assets (including surpluses) ensures that the company utilizes its resources for the good of the community preventing assets being transferred for private benefit. community identified in the community interest statement. No special tax incentives Unlike charities a CIC, being relatively commercially focused, does not benefit from the same tax incentives as charities in areas like Gift Aid or corporation tax benefits.

Establishing a CIC To become a Community Interest Company an organisation must: Meet the Community Interest Test File an annual CIC report with its accounts Keep the community in touch with its activities Only use its assets and profits for the community specified (or pass them to another body with similar features), known as the asset lock Register in the same way as a normal company with the same incorporation documents but supplemented by a Community Interest Statement In terms of registering a CIC the process is no more burdensome than registering a limited company in that memorandum and articles of association are required, Forms 21 and 23 must be filed but what is additionally required is: Community Interest Statement (Form CIC 36) Special resolution to alter company name and memorandum (if converting to a CIC) 2.3 Industrial & Provident Society (IPS) An IPS is an organisation set up to trade for community benefit. It is incorporated, making it a legal entity in its own right and are regulated by the Financial Services Authority (and set up through DETI). IPS Advantages Incorporation Same advantages of the company structure (CLG) above i.e. corporate identity, continuity, involvement of members and limited liability Arbitration Support from FSA if disputes arise Democracy & accountability regardless of the number of shares owned by a member, the society is governed on a one member one vote basis IPS disadvantages Cost Increased cost relative to mainstream limited company (through DETI rather than companies house) Lack of privacy Similar to company structure, public scrutiny of accounts and annual return to be completed (AR30) Non Charitable (HMRC & Tax) Unlikely to attract charitable status, dependant on activity and beneficiaries

The information in this worksheet is for guidance only and when considering the legal structure of your social enterprise, legal guidance should be sought. Work West 2012

Guidance worksheet
Inflexible (relatively so) The rules arent as flexible as that of a limited company

3.

Sources of information & support Dept of Enterprise Trade & Investment www.detini.gov.uk CIC Regulator www.cicregulator.gov.uk Company Formation: Phil Nicholls, Belfast NICVA & Company Shop, Belfast

NICVA www.nicva.org Companies House www.companieshouse.gov.uk DIY Committee www.diycommitteeguide.org

The information in this worksheet is for guidance only and when considering the legal structure of your social enterprise, legal guidance should be sought. Work West 2012

Guidance worksheet
4. At a glance LEGAL STRUCTURES FOR SOCIAL ENTERPRISE AT A GLANCE
This is a rough guide to the legal structures most commonly associated with social enterprise. For more information on them, see http://www.acevo.org.uk/legalforms/ or the websites listed below. For more general information about business structures, including other options such as partnerships and limited liability partnerships, see http://www.nibusinessinfo.com . However, there is a lot of law on each of the legal structures described below and you should consider seeking legal advice before your organisation adopts any of them.
Legal structure Summary - most typical features Ownership, governance and constitution Assets owned by trustees and managed in interests of beneficiaries on the terms of the trust. Directors manage the business on behalf of members. Considerable flexibility over internal rules. As for other limited companies, but subject to additional regulation to ensure community benefits. Is it a legal person distinct No. Trustees are personally liable. Can its activities benefit those who own and/or run it? No. The trustees/ directors cannot benefit, unless the trust, court or Charity Commission permit. Yes (but no dividends etc to members if it is a company limited by guarantee). Assets "locked in" for community benefit? Yes, if the trust is established for community benefit. Would need bespoke drafting in articles (which could be amended by members). Yes, through standard provisions which all CICs must include in their constitutions. Can it be a charity and get tax benefits? Yes, if it meets the criteria for being a charity. Yes, if it meets the criteria for being a charity.

Trust

A way of holding assets so as to separate legal ownership from economic interest. Most frequently adopted corporate legal structure. Can be adapted to suit most purposes.

Limited company (other than Community Interest Company) www.companieshouse.g ov.uk Community interest company (CIC) www.cicregulator.gov.uk

Yes. Members' liability is limited to amount unpaid on shares or by guarantee. Yes. Members' liability is limited to amount unpaid on shares or by guarantee.

Limited company structure for social enterprise with secure "asset lock" and focus on community benefit.

Yes, but they must benefit the wider community as well. CICs can pay limited dividends to private investors.

No, but can become a charity if it ceases to be a CIC or can convert to the assetlocked form of a community benefit society. No. It would have to be constituted as community benefit type of IPS.

Industrial & Provident Society (IPS) (Co-operative) www.detini.gov.uk

For bona fide co-operatives that serve members' interests by trading with them or otherwise supplying them with goods or services.

Committee / officers manage an IPS on behalf of its members. One member, one vote (regardless of eg sizes of respective shareholdings).

Yes. Members' liability is limited to amount unpaid on shares.

Yes, but they should do so mostly by members trading with the society, using its facilities etc, not as a result of, for example, shareholdings. Must primarily benefit nonmembers; asset lock applies. Members: no. Charity trustees: only if constitution, court or Charity Commission permit.

Would need bespoke drafting in articles (which could be amended by members).

Industrial & Provident Society (IPS) (Community Benefit Society (BenComm)) Charitable Incorporated Organisation (CIO) www.charitycommission.gov.uk/re gistration/charcio.asp

Benefit the community rather than just their own members and have special reason not to be companies. First ready-made corporate structure specifically designed for charities.

Like Co-op type, but new legislation provides option of more secure form of asset lock. Similar to company but with different terminology (eg for "directors" read "charity trustees").

Yes. Members' liability is limited to amount unpaid on shares. Yes. Members' either have no liability or limited liability.

Yes (asset lock only survives dissolution if new statutory form of asset lock adopted). Yes.

Yes, if it meets the criteria for being a charity. Cannot be anything but a charity, and must meet the criteria for being a charity.

The information in this worksheet is for guidance only and when considering the legal structure of your social enterprise, legal guidance should be sought. Work West 2012