When setting up an organisation with a social purpose, you must decide what form it is going to take. You may consider establishing a charity or a social enterprise. Although many organisations fall into both brackets there are many distinct differences that are important to note.
A charity is an organisation which is established for the public benefit and which has purposes (the charity’s objects) which are exclusively charitable.
A social enterprise is not defined by its legal form, but rather by its nature. Social enterprise is defined by government as “a business with primarily social objectives whose surpluses are principally reinvested for that purpose in the business or in the community, rather than being driven by the need to maximise profit for shareholders and owners".
Becoming a charity
Charities are free to trade to fulfil their primary purpose and in furtherance of their charitable objects. For example a nursery can charge for the provision of childcare. Where a charity wishes to engage in other forms of trade to raise money for its charitable purposes, it may need to set up a subsidiary company to undertake the trade. That subsidiary can generally donate its profits to its parent charity free of tax by Gift Aid.
Tax is a major reason why a social enterprise may consider charitable status – in the UK charities benefit from arguably the most generous tax regime in the world.
Charities also benefit greatly from the prestige of charitable status, both in terms of public perception and grant funding. However, there are constraints imposed on charities which may render charitable status unappealing for some:
a) charity trustees, who are responsible for the charity’s administration and management, cannot normally be paid for acting as a trustee;
b) charities cannot pay surpluses to their members during its lifetime or on winding up;
c) due to the limitations on payments to trustees, it may be the case that the organisation’s founder does not sit on the board, but is paid as a chief executive, who could potentially be removed should the trustees decide to appoint a new chief executive;
d) charitable assets must always be used for charitable purposes, and once the assets are charitable, they will always be charitable;
e) charities are regulated by the Charity Commission, which has wide-ranging investigative powers.
Becoming a social enterprise
The social mission forms the very essence of a social enterprise and it must trade with this in mind. Instead of being driven by profit, the main driver of a social enterprise is social improvement of some description. Some legal forms permit profit distribution, others do not.
The potential tax benefits for a social enterprise will be dependent on the form it wishes to take. The choice of legal form for a social enterprise will have significant bearing on the way the enterprise is established and run.
When setting up a social enterprise or a charity, there is a great deal to think about. The social mission of the organisation must be very clear. With this in mind, it must choose the most appropriate form. The organisation must also identify its target market and ensure it is getting the right people involved.
A good place to start may be the decision tool which can be found here. This tool is designed to help organisations find the legal form best suited to them.
If you have any further queries regarding charities or which socially conscious form your organisation should take, take a look at the range of guidance notes available in the customisable documents section of the site examples of which include:
Alternatively please do get in touch with one of the Charity and Social Enterprise team.