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".
When setting up a social enterprise, there is a great deal to think about: its social mission, how it will be financed, its legal form and getting the right people involved.
Although not defined by its legal form, the choice of legal form will have a significant bearing on the way the enterprise is established and run. Social enterprises come in all shapes and sizes and there are a variety of issues to consider when choosing the legal form that may be right for your organisation:
1. Safeguarding the chosen social mission
Social enterprises are driven by some form of social improvement, rather than by profit. The social mission forms the very essence of a social enterprise and it must trade with this in mind. The level of protection afforded to the social purpose of your organisation will depend upon its legal form. If protections are not put in place, this purpose can easily be changed. This social mission must be very clear, and must be borne in mind when choosing the appropriate legal form.
2. Sources of funding
A number of forms of finance are available to social enterprises, including grants, debt and equity finance. The types of funding available to your organisation will depend on its legal form.
If your organisation is likely to be dependent on its own surpluses, it is important to consider the tax implications of each legal form before making a decision. For example, charities benefit from a particularly wide range of tax exemptions and benefits.
3. Managing the risk
Social enterprises can be incorporated or unincorporated. Board members of an unincorporated organisation may be personally liable for meeting any liabilities of the organisation in the event of an asset shortfall. Conversely, an incorporated organisation generally has limited liability, meaning that there is no wider liability for the board beyond the assets owned by the organisation. However, unincorporated forms are easier to establish. When choosing a legal form for your social enterprise, it is important to consider the level of risk that will be faced by the organisation and its management team. For example, higher risk activities include employing staff or taking on property.
Choosing a legal form
Careful consideration of the above issues will allow you to select the legal form most appropriate for your organisation.
Unincorporated legal forms include:
a) Sole trader: individuals set up and run their business on their own, with no formalities;
b) Partnerships: two or more people carry on business in common with a view to generating profit; or
c) Unincorporated associations: an organisation of two or more persons who agree, usually in a written constitution, to cooperate in furthering a common purpose.
Incorporated legal forms include:
a) Companies: the most common types of company used for social enterprise are the company limited by guarantee (“CLG”) and the company limited by shares (“CLS”);
b) Registered societies: community benefit societies or co-operative societies;
c) Community Interest Companies: a particular type of company that uses its assets and profits for the community benefit; or
d) Limited liability partnerships.
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 social enterprises or the appropriate legal form for your organisation, take a look at the range of guidance notes available in the customisable documents section of the site, which includes:
Alternatively, please do get in touch with one of the Charity and Social Enterprise team.