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How do I set up my social enterprise?

shutterstock_124232086Social Investment Tax Relief is a great way to attract investment in your business.

So what type of business qualifies?

The guidance is very loose noting that an investment will qualify if invested in a social enterprise, and defines a social enterprise as a community interest company, a community benefit society, or a charity.

At Sapphire Capital our clients often ask us how best to  structure their business to stay within this criteria?

Her Majesty’s Revenue Commission (HRMC) guidance advises that there are a number of structures which you could opt for, namely a:

• Limited Company

• Community Interest Company

• Charity

• Mutual Society

• Sole Trader or Business Partnership.

This blog includes a brief summary of each type of company structure to help you decide which structure is best for your social enterprise.


Limited Company

You can set up a private limited company to run your business, and choose whether to limit it by way of shares, or by guarantee.

If limited by shares then the company is owned by its members (called shareholders). A private company limited by guarantee means the members of the company financially back it up to an agreed amount.

All limited companies must be registered with Companies House and the documentation must include:

• a valid company name,

• an address for the company,

• the name of at least one director,

• the name of at least one shareholder (who can be a director),

• Memorandum of Association (a legal document noting the agreement of all initial shareholders to create the company),

• Statement of Capital (details of the company’s share capital and the rights attached to each type of share)

• Articles of Association (written rules about how the company is run).

Once registered the company will be issued with a ‘Certificate of Incorporation’. This confirms that the company legally exists and shows the company number and date of formation.


Community Interest Company

Another type of limited company which you could choose is a Community Interest Company (CIC). This type of company exists to benefit the community rather than for the benefit of private shareholders.

The CIC legislation was introduced as a legal form under the Companies Act 2006, and is being used increasingly as an effective structure for social enterprises. This structure is particularly attractive if you would like to benefit from limited company status.

All CICs must be registered with Companies House and the documentation must include all information noted above for a Limited Company, as well as:

• A Community Interest Statement (this document explains what your social enterprise plans to do)

As a CIC you will also need to create an Asset Lock, which is a legal promise stating that the enterprise’s assets will only be used for its social objectives, and setting limits to the money the business can pay to shareholders. The asset lock provision gives confidence to investors in the CIC, and those dealing with it that the assets and profits will primarily be devoted to the benefit of the community rather than rewarding the owners or investors. /blog/social-investment-asset-lock

Additionally there are restrictions on the dividends and performance related interest payable to shareholders, with the maximum aggregate dividend cap being 35% of the paid up value of a share, and the performance related interest limited to 20%.

A CIC cannot be a charity, an Industrial Provident Society or an unincorporated organisation.

The CIC must be approved by the community interest company regulator, and once this approval is received Companies House will issue a certificate of incorporation as a CIC.

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If you wish to establish your enterprise as a charity it must have a ‘charitable purposes' and the charity must exist for public benefit. Your charity’s ‘purpose’ is what it is set up to achieve.
A charitable purpose is defined by the Charities Act 2011 and include things that contribute to:

• relieving poverty

• education

• religion

• health

• saving lives

• citizenship or community development

• the arts

• amateur sport

• human rights

• religious or racial harmony

• the protection of the environment

• animal welfare

• the efficiency of the armed forces, police, fire or ambulance services.

If you consider that your enterprise meets the definition of charitable purpose you will need to choose a structure for your charity and there are four common charity structures.

Charitable company – a charitable company must be registered with Companies House. Trustees have limited or no liability for a charitable company’s debts or liabilities.

Charitable incorporated organisation (CIO) this is an incorporated structure designed for charities. You create a CIO by registering with the Charity Commission. You don’t need to register with Companies House. Trustees have limited or no liability for CIO debts or liabilities.

Charitable trust – this is a way for a group of people (‘trustees’) to manage assets such as money, investments, land or buildings. Charitable trusts are not allowed to be run for profit.

Unincorporated charitable association – this is a simple way for a group of volunteers to run a charity for a common purpose. Unincorporated charitable associations can’t employ staff or own premises.

You must create a ‘governing document’ (or ‘rulebook’) for your charity that explains how the charity is run. This document will inform trustees and other interested parties.

In England & Wales, you must register the charity with the Charities Commission for England and Wales, if:

• the annual income of the charity is greater than £5,000;

• or if has been set up as a charitable incorporated organisation (CIO).

In Scotland all charities must register with the Scottish Charity Regulator.

And in Northern Ireland all charities must register with the Charity Commission for Northern Ireland.


A mutual society

Co-operatives and industrial and provident societies are both types of mutual societies. A mutual society is an enterprise owned by, and run for, the benefit of all of its members.

The co-operative model is flexible and enables businesses of all sizes to grow. It is owned by the members and therefore gives them a stake in the business and harnesses their ideas. They are run for the mutual benefit of their members, with any surplus usually being ploughed back into the enterprise to provide better services and facilities. The members may be employees, customers, suppliers or local residents, but this shared ownership is central to the co-operative’s existence. If you want to structure your enterprise as a co-operative you must be prepared to accept this shared ownership. If you want to limit control to certain persons, then a co-operative is not for you.

An industrial and provident society is an enterprise conducting an industry, business or trade, either as a co-operative or for the benefit of the community, and is registered under the Industrial and Provident Societies Act 1965.


Sole trader or Business Partnership

Alternatively , if you want to have sole or limited ownership, you may decide it is best to set up the enterprise as a sole trader, or business partnership. As a sole trader, or business partnership, you make the decisions and run your own business.

Sole traders must register with HM Revenue and Custom (HMRC) and follow certain rules on running and naming their business.

So how you structure your enterprise will very much depend on how much control you want to maintain over the business, and how you want to fund the business.

Be aware that if you want to raise funds through the allocation of shares then you will need to set up as a Limited Company or CIC. However if the business is being funded through debt equity then any of the other structures are open for your consideration.

If you are interested in establishing a social enterprise, or attracting investment into your organisation, and would like our help please contact us at Sapphire Capital Partners LLP. We are happy to help.

Violet Spence
Violet Spence
Previously a manager at Sapphire Capital Partners LLP, Violet now retired, spent her days assisting clients with SITR, SEIS and EIS schemes for companies and applying to HMRC for advance assurance on behalf of clients. 

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