NCVO and Social Enterprise UK
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Q&A on social enterprises and the law

What is a social enterprise?

The term “social enterprise” describes the purpose of a business, not its legal form. There is no commonly agreed definition of “social enterprise”, but in general terms, social enterprises are businesses which exist to pursue social and environmental objectives, rather than to realise profit for owners or shareholders. Profit, better called "surplus", is generated but rather than being distributed to the owners of the business it is used for wider social benefit by being reinvested in the business or in the wider community.

Social enterprises operate in a wide variety of sectors but are particularly prevalent in areas such as social care, health, housing, education, environmental protection and regeneration. Some are household names, but the majority are much smaller and operate at a local community level.

But charities exist to pursue social goals for the public benefit. Why would I set up a social enterprise instead of a charity?

Many social enterprises are charities. Charities can trade to pursue their public benefit purposes and many do so very successfully. However, being a charity doesn't suit all social entrepreneurs. Some forms of social enterprise allow the people who run them to combine social purposes with a limited reasonable investment return and also direct management control. This is not always possible with a charity. The board members of those social enterprises can be remunerated (unlike most charity trustees) and social enterprises can, in some forms, have shareholders able to receive limited dividends. Charities are more regulated, but in return receive tax privileges unavailable to other social enterprises.

If social enterprises trade to generate profit for their owners, then aren't they just ethical businesses?

There is no precise definition of either term so there is an overlap. Where ethical businesses exist to sell goods and services in an ethical way, social enterprises exist to re-invest profit back into their businesses to help them pursue their social goals. Each can have characteristics of the other and the terms may be used interchangeably in practice.

What legal forms might social enterprises take?

Social enterprise is a descriptive term for the range of businesses pursuing social goals rather than a legal form in itself. There are various legal entities that may operate as social enterprises. These include community benefit societies, co-operatives, community interest companies and in some cases commercial form companies limited by shares. The most common form for charitable social enterprises is the company limited by guarantee. The community interest company, or CIC, is a type of company which was specifically created as a vehicle for social enterprise. A CIC is set up for specified community benefit purposes and it is legally obliged to pursue this mission. It cannot be privatised or distribute capital value. To encourage socially focused investment it can distribute some, but not all, of its surpluses.

What are the differences between a CIC and a normal company?

CICs must exist for the community interest and set out that community interest in their constitutional documents. They also have to register with the government's CIC regulator when they are set up and report to that regulator every year, to show that they have been pursuing their community interest. Normal companies, including social enterprises that are companies but not CICs, do not have to report in this way, nor are they required to set out a community interest in their constitutional documents, although in practice most social enterprises do typically express a social purpose in their constitutions.

The other major difference is that a CIC's assets are locked into the business. This is to ensure that they are applied for its social purpose. If the CIC is wound up, its assets must be transferred to another, similarly asset-locked body. The percentage of a CIC's annual profit that it can pay out to its shareholders as dividends is limited. This is so that the majority of its profits are always re-invested in pursuit of its social purpose. If the company is financed by loans where the interest is calculated by reference to the CIC's profitability, then the interest that can be paid to the lender each year is also capped.

Why would I set up a CIC instead of a normal company?

The attraction of CICs is that they allow an entrepreneur to ensure their new business will always operate in the community interest. But unlike a charity, a CIC allows a paid board and the limited payment of dividends. This means the entrepreneur can clearly explain to the public that the business is for the community interest but receive reasonable remuneration and seek equity investment for the social purpose. While less regulated than charities, the CIC form does guarantee that assets and the majority of profits have to be applied to pursue social purposes rather than for the private benefit of shareholders.

What do I need to do to set up a social enterprise?

Other than a commitment to positive social change and entrepreneurial flair it depends on what legal form best suits your plans. It is well worth taking time to investigate the options and if necessary take legal advice. If you want to set up as a limited company, you will need to have the company's constitutional documents drafted and file these at Companies House, with some administration forms and a small fee.
If you want to set up a CIC, you will also have to complete a Form CIC36 and include it in the papers that you file with the registrar of companies, together with a small fee. Form CIC36 is an application to the CIC regulator for your company to be registered as a CIC. It must include a statement of what the CIC's social purpose is and what activities it will carry out to achieve them.

Apart from red tape, is there anything else I need to be aware of?

A new social enterprise will have similar issues to other business start-ups. Among other things it will need finance to buy assets and stock, take on property and staff and start trading. It will also need to comply with the host of regulations that apply to all new businesses from tax to health and safety.

Where can I get further information on social enterprise?

The following may be useful:

Community Interest Company Regulator www.gov.uk/government/organisations/office-of-the-regulator-of-community-interest-companies

If you have decided to set up a social enterprise and need guidance on the sort of legal form which might suit you, you can use the Get Legal decision tool. You may also find the Get Legal Guide to Legal Forms for Social Enterprises useful.

Bates Wells Braithwaite LLP can provide bespoke advice on setting up and running a social enterprise. Please visit our website or contact +44(0)20 7551 7777.



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