Different Types of Social Enterprise

Social Enterprises come in all shapes and sizes, with a variety of different business models. There is no right or wrong answer. The table below provides some basic details about the different structures most commonly associated with social enterprise (note: there are others). Once you get to the stage of choosing which model is right for you, before deciding on any structure we always encourage social entrepreneurs to seek legal advice to discuss your options when choosing a business model including; liability, ownership, funding, governance and profit distribution.

Unincorporated associations

Q. What is their legal structure?

A. Usually voluntary or community organisations. Can be registered charities. Informal – governed by association rules or charter


Q. What is the ownership, governance and constitution?

A. Nobody owns this. It is governed by its own rules and regulations.


Q. Is it a legal entity distinct from those who own/run it?

A. No. This can create problems around liability, contracts and holding property.


Q. Can its activities benefit those who own/run it?

A. Dependant on the organisations own rules.


Q. Are assets locked in for community benefit?

A. This would need bespoke drafting to achieve this.


Q. Can it be a charity and get charitable status tax benefits?

A. Yes if it meets the criteria for being a charity.


Q. What are the PROs?

A. Voluntary/Community Organisation:

  • Governed by simple constitution
  • No regulation such as Companies House
  • Easy to set up

Registered charities:

  • Easier to raise funds from trust funds and companies
  • Tax exemptions and relief for registered charities.

Q. What are the CONs?

A. Voluntary/Community Organisation:

  • No legal entity – can only enter contracts through its members
  • Management commitee are responsible for debts
  • Despite lack of legal identity, may need to pay corporation tax and file a tax return

Registered charities:

  • More regulation in return for tax benefits
  • Significant restrictions of trading
  • Charitable aims enforced by trustees may impact entrepreneurial aims

Limited Company (other than Community Interest Company)

Q. What is their legal structure?

A. Most frequently adopted corporate legal structure, adaptable to most circumstances.


Q. What is the ownership, governance and constitution?

A. Directors manage business on behalf of members. Considerable flexibility over internal rules.


Q. Is it a legal entity distinct from those who own/run it?

A. Yes: members’ liability limited to amount unpaid on shares or by guarantee.


Q. Can its activities benefit those who own/run it?

A. Yes (But no dividends if it is limited by guarantee).


Q. Are assets locked in for community benefit?

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


Q. Can it be a charity and get charitable status tax benefits?

A. Yes if it meets the criteria for being a charity.


Q. What are the PROs?

A. By guarantee:

  • Legal entity separate from members
  • Can own property and hold contracts
  • Directors can be paid

By shares: As above with the addition of:

  • Good investment model – ability to pay dividends may make it easier to attract private investors
  • Embeds entrepreneurial drive; shareholders benefit from company’s success.

Q. What are the CONs?

A. By guarantee:

  • Regulation from the Companies Act
  • More responsibilty for members involved –company directors
  • May be difficult to get philanthropic donations / grant aid
  • Assets are not protected with an asset lock

By shares: As above with the addition of:

  • Potential conflicts of interest between social entrepreneur and broader shareholder constituency

Community Interest Company (CIC)

Q. What is their legal structure?

A. Can be private limited companies by guarantee /shares or a public limited company. Adopt the co-operative, not for profit or general commercial model.


Q. What is the ownership, governance and constitution?

A. As for other limited companies, but subject to additional regulations including satisfying community interest tests and adopt certain statutory clauses.


Q. Is it a legal entity distinct from those who own/run it?

A. Yes; members’ liability limited to to amount unpaid on shares or by guarantee.


Q. Can its activities benefit those who own/run it?

A. Yes, but must benefit wider community as well. Can pay limited dividends to private investors.


Q. Are assets locked in for community benefit?

A. Yes, through standard provisions which all CIC’s must include in their constitutions.


Q. Can it be a charity and get charitable status tax benefits?

A. No, but it can become a charity if it ceases to be a CIC.


Q. What are the PROs?

A.

  • Distinct brand for Social Enterprises
  • Embraces democratic ownership, not for profit and commercial models
  • Combines freedom of entrepreneurial activity with protection of “asset lock”
  • Directors can be paid
  • Light touch CIC regulator
  • Separate legal identity from members
  • Can own property/enter into contracts

Q. What are the CONs?

A.

  • Dual regulation from Companies Act and CIC Regulator
  • More responsibilty for members involved – become company directors
  • May be difficult to get philanthropic donations / grant aid
  • Cap on dividends (“asset lock”) could depress demand from Investors

Industrial & Provident Society (IPS)

Q. What is their legal structure?

A. For co-operatives that serve members’ interests by trading with them or otherwise supplying them with goods or services.


Q. What is the ownership, governance and constitution?

A. Committee / officers manage on behalf of members. One member, one vote (regardless of, for example sizes of respective shareholdings.


Q. Is it a legal entity distinct from those who own/run it?

A. Yes; members liability limited to amount unpaid on shares.


Q. Can its activities benefit those who own/run it?

A. Yes; but should do mostly by members trading with society, using its facilities etc, not as a result of e.g shareholdings.


Q. Are assets locked in for community benefit?

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


Q. Can it be a charity and get charitable status tax benefits?

A. No- would have to be constituted as a community benefit type of IPS.


Q. What are the PROs?

A.

  • Good for promoting democratic ownership and control through co-operative structures
  • Separate legal identity to reduce risk to members
  • Can own property/enter into contracts

Q. What are the CONs?

A.

  • Less fit for purpose for organisations with hierarchical structures
  • Not as well recognised as other legal structures such as a company limited by guarantee or registered charity
  • FSA registration entails formalities (e.g. keeping and filing accounts)