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Social enterprises

Introduction

“Social enterprise” is a relatively modern expression which has been defined as:
An enterprise that is owned by those who work in it and/or reside in a given locality, is governed by registered social as well as commercial aims and objectives and run co-operatively may be termed a social enterprise (Freer Spreckley: Social Audit – A Management Tool for Co-operative Working [1981]).

In the British context, social enterprises include community enterprises, credit unions, trading arms of charities, employee-owned businesses, co-operatives, development trusts, housing associations, social firms, and leisure trusts.

Social enterprises may or may not be not for profit or charitable. This page deals with enterprises which do not require charitable status. For charitable organisations, see our section on Charities.

For further help and information about Social enterprises, visit:


* the GOV.UK pages Setting up a social enterprise


* Social Enterprise Coalition


* Get Legal

Legal structures for social enterprises


The available structures are:


* Unincorporated association
* Limited company (shares or guarantee)
* Community interest company
* Community benefit society

* Comparison between a registered society and a limited company

Unincorporated association


The simplest type of organisation will be an unincorporated association. All that is required is a written constitution in the form of rules and the appointment of the first members. Apart from an application form, register of members and perhaps payment of a fee, no other formalities would be needed.


Legaleze comment: it will usually be advisable for a social enterprise, to incorporate in order to gain separate <legal personality> and <limited liability> for its members and governing body. For example, in a case in 2008, the Chairman and the Treasurer of an unincorporated golf club were prosecuted for allowing heating oil from a tank to leak into a watercourse.

If the club had been a corporate body, the directors could only have been prosecuted personally if the offence had been committed with their consent or connivance or had been attributable to any neglect on their part. It was accepted in the case that neither the Chairman nor the Treasurer came into that category. However, the Court of Appeal held that it was lawful to prosecute the two officers: R v RL & JF [2008] EWCA Crim 1970.

Limited company


The limited company status includes three forms:


* private company limited by guarantee


* private company limited by shares


* public company limited by shares

These legal structures for trading are considered in the pages on the Private limited company and Public company. In relation to the use of these structures for social enterprises,  it should be noted that company law does not protect or recognise co-operative principles.


Legaleze comment: company law is well developed and competent professional advisers will be familiar with it. By comparison, the law relating to industrial and provident societies (see below) is less well developed and fewer advisers are familiar with it.
A limited company by guarantee will be appropriate if there is to be no share capital.

If share capital is required, a private limited company may be used.

In the case of a large organisation, or if it desired to offer shares to the public, a public limited company may be appropriate. This type of company may lawfully offer its shares to the public.

Community Interest Company (EW, S; extended to, NI)


A Community Interest Company (“CIC”) is special type of limited company for people wishing to establish businesses which trade with a social purpose, or to carry on other activities for the benefit of the community (Companies Audit, Investigations and Community Enterprise) Act 2004; Community Interest Company Regulations 2005 ).

There is a regulator for CICs which maintains a website which provides detailed information about Community Interest Companies


The CIC regulator decides if a company is eligible to be a CIC. The registration formalities and maintenance of the CIC’s public record is the responsibility of the Registrar of Companies.

Purpose of CICs


The CIC regulator’s website states that CICS’s are being recognised more and more as an effective legal form for social enterprises. They are particularly attractive to those wishing to enjoy the benefits of limited company status and to make it clear that they want to be established for the benefit of the community rather than their members but are not able, or do not wish to become charities

Legal form of CIC


A CIC must be incorporated as or convert from one of the forms of limited liability company described above, i.e. a company limited by guarantee, private company limited by shares or a public company limited by shares. The CIC is therefore not a separate legal form.
A CIC may not be an English charity or a Scottish charity.

Restrictions on CIC capital and income


As CICs are intended to use their assets, income and profits for the benefit of the community they are formed to serve, they must embrace some special restrictions:


* they are subject to an ‘asset lock’ whereby assets must be retained within the company to support its activities or otherwise used to benefit the community;


* CICs may not transfer assets at less than full market value unless they are transferred to another asset locked body (such as to another CIC or a charity);


* If its constitution allows a CIC to pay dividends (other than to another asset locked body – essentially another CIC or a charity) these will be subject to a cap that limits the amount of dividend payable;


* A similar cap applies to interest payments on loans where the rate of interest is linked to the CIC’s performance;


* On dissolution of a CIC any surplus assets must be transferred to another asset locked body.


A CIC limited by guarantee cannot by its nature (no share capital) pay dividends to members.


In the case of a CIC limited by shares, dividends are subject to a cap. For shares issued on or after 6 April 2010, the cap per share is 20% of the paid up value of the share, and the overall limit on dividends is 35% of distributable profits in any year.

What’s new items [go to What’s new? page or archive for more details]:

19/09/2014: Community Interest Company dividend cap removed

The Community Interest Company (Amendment) Regulations 2014, SI 2014/2483, remove part of the share dividend cap for community interest companies (CICs) from 1 October 2014.

The share dividend cap which prevents a CIC paying more than a certain percentage of the paid up value of the share as a dividend in any one year has been removed as the limit has been found to be a barrier to investment in CICs due its reduction of share transfer liquidity and • unnecessarily restricting the dividends payable.

Community interest test


A CIC must satisfy the CIC Regulator that it satisfies the community interest test. A company satisfies the community interest test if a reasonable person might consider that its activities are being carried on for the benefit of the community. A CIC may not be an English charity or a Scottish charity. The regulations exclude a company if it a political party or a company which is a political campaigning organisation.
(Community Interest Company Regulations 2005 part 2)

CIC name


A private community interest company’s name must end with “community interest company” or “c.i.c.”. If the memorandum of the company states that the company’s registered office is to be situated in Wales, the name may end with the Welsh equivalent (“cwmni buddiant cymunedol” or “c.b.c.”).
A public community interest company’s name must end with “community interest public limited company” or “community interest p.l.c.” (or Welsh equivalent if the memorandum of the company states that the company’s registered office is to be situated in Wales).
As with any registered company, a CIC must not have a name which is the same, or is treated the same, as an existing company or LLP. Clearance is needed for “sensitive” words and expressions such as “Royal” etc. A name which may be regarded as too similar to existing company or business name should also be avoided (Companies Act 2006 Part 5). For more information about choosing a company name, see the Companies House Companies Act 2006 Guidance – Choosing a company name

Business names


As with other types of company, if a CIC trades under a name other than its full registered name, it must comply with the business name regulations (see Companies Act 2006 Guidance Chapter 9 – Business Names).

How to set up a CIC:


* choose a name for the company having regard to the company and business name regulations and existing similarly named businesses
* prepare a short description of the community, or section of the community, which it is intended that the company will benefit below, and a more detailed description of the activities to be undertaken by the CIC and how they will benefit the community
* draw up articles of association which comply with the Community Interest Company Regulations 2005 (you may download a suggested model from the CIC Regulator’s website and use or adapt that model)
* decide where the registered office will be
* decide who will be the directors and company secretary (secretary is optional unless the company is a public company)
* decide upon the initial share capital (unless the company is limited by guarantee)
* consult theCommunity Interest Companies pages for assistance
* complete form IN01 which may be downloaded from the Community Interest Companies pages; each director must sign the consent to appointment
* do not complete section A3 and choose option 3 in section A7 (i.e. bespoke articles of association)
* the form must be signed either by all the subscribers (i.e. founding shareholders) or an agent. NB: only one subscriber is needed; more shareholders can be added after the company has been incorporated
* complete form CIC 36 which may be downloaded from the CIC website; this must be signed by all the directors
* the subscriber(s) must sign the memorandum of association (the form for this may be downloaded from the CIC website)
* deliver the completed forms to Companies House with the fee (depending on the location of the principal place of business, deliver to Cardiff (England and Wales or Wales only), , Edinburgh (Scotland) or Belfast (Northern Ireland)
* receive the certificate of incorporation
* open a bank account
* register a PAYE account with HMRC regarding any paid members (if applicable)
* consider whether and when you should apply for VAT registration.

Community benefit society

Community benefit societies were formerly called  Industrial and provident societies and were governed by the Industrial and Provident Societies Act 1967 to 1978. The extensive and complex legislation was consolidated by the Co-operative and Community Benefit Societies Act 2014 (CCBSA) with effect from 1 August 2014.


Societies registered under the 2014 Act or previous legislation may be formed either as a Co-operative Society or as a Community Benefit Society. Both types are corporate bodies with legal personality and limited liability. Co-operative Societies are dealt with in our page on Co-operatives. Unlike co-operatives, community benefit companies are by definition not intended as a medium for trading primarily for the benefit of members.

A society qualifies for registration under the 2014 Act if it is a society for carrying on any industry, business or trade (including dealings of any kind with land) which meets the following conditions:

(a) that it is shown to the satisfaction of the Financial Conduct Authority (FCA):

(i) in the case of registration as a co-operative society, that the society is a bona fide co-operative society, or

(ii) in the case of registration as a community benefit society, that the business of the society is being, or is intended to be, conducted for the benefit of the community;

(b) that:

(i) the society has at least 3 members, or

(ii) the society has 2 members both of which are registered societies;

(c) that the society's rules contain provision in respect of the matters mentioned in CCBSA s. 14, and

(d) that the place that under those rules is to be the society's registered office is in Great Britain or the Channel Islands.

Benefit of the community test

The FCA provide guidance on the registration of Registered Societies on its website. The FCA will normally expect a  Community benefit society to to fulfil the following conditions:

* Conduct of business - The business must be run primarily for the benefit of people who are not members of the society, and must also be in the interests of the community at large. It will usually be charitable or philanthropic in character.

* Interest on share and loan capital - It is unusual for a community benefit society to issue more than nominal share capital (for example, one £1 share per member). Where it does issue more than nominal share capital or where members make loans to the society, or both, any interest paid must not be more than a reasonable rate necessary to obtain and retain enough capital to run the business.

* Profits and assets - The society's rules must not allow either profits or the society’s assets to be distributed to the members. Profits must generally be used to further the objects of the society by being ploughed back into the business. Where profits are used in part for another purpose, that purpose should be similar to the main object of the society, for example for philanthropic or charitable purposes. The rules must specify the beneficiary or beneficiaries, if any.

Where the rules of the society allow assets to be sold, the proceeds of the sale should be used to further the society’s business activities only.

* Dissolution - The society's rules must not allow its assets to be distributed to its members on dissolution. The rules should state that on dissolution the assets should be transferred, for example, to some other body with similar objects. If no such body exists, the rules should state that the assets must then be used for similar charitable or philanthropic purposes.

* Charitable objects: If a society with a registered address in England and Wales has exclusively charitable purposes for the public benefit it is an ‘exempt charity’. This means it cannot be registered with the Charity Commission but it is still subject to charity law. For details on these points societies are encouraged to contact the Charity Commission.

A society which has its registered office situated in Scotland must register with the Office of the Scottish Charity Regulator in order to be recognised as a charity. For details on these points societies are encouraged to contact the Office of the Scottish Charity Regulator.

Names for society


Before deciding upon the proposed name of the society, you should check the notes on the subject of names in the application form notes which may be downloaded from the FSA website page on Industrial and Provident Societies referred to above.


Among other requirements, the name should not be the same or too similar to the name of an existing registered society or registered company. It will be necessary for this purpose to check both the FCA Mutuals Public Register
and the index of company names which may be accessed from the Companies House website

How to set up a registered society


Consult the FCA website relating to Registered Societies noted above:

Note that an application made through one of the Model Rules Sponsors, such as Co-operatives UK, will facilitate the approval of the Rules and speed up the application process.

You will need to:


* Choose a name acceptable to the FCA;


* Draw up a detailed description of the activities the society will undertake and explain how these activities will benefit the community. This is important because the information you provide here will help the FSA to decide if there are special reasons why the society should be registered under the Industrial and Provident Societies Act 1965 and not as a company under the Companies Acts;


* Prepare a set of rules of the society which deal with all the matters required by the law
* Complete the application form;


* Have three members and the secretary available to sign the form;


* Submit it to the FCA with the fee

Comparison between a registered society and a limited company registered under the Companies Act


Societies registered under the 2014 and predecessor Acts share the characteristics of legal personality and limited liability with companies registered under the Companies Act 2006 and its predecessors. However, some salient points of difference between registered societies and companies registered under the Companies Act are as follows (NB: this is not a comprehensive list):


* Societies may issue shares to the public as may a public company, but a private limited company may not;


* Financial promotion regulations do not apply to shares of a registered society if non-transferable (Sched. 1 para. 14 Financial Services and Markets Act 2000 (Financial Promotion) Order 2005);


* The distribution of profits or capital to members of a society is not permitted (se above);


* Members of a society’s committee are not subject to a detailed regime of duties and liabilities to members unlike that applicable to shareholders of a company [although the courts would probably apply similar principles];


* The services rendered to a society by a member of the committee of management or other directing body of such a society in his capacity as such are excluded from the statutory implied term that a supplier acting in the course of a business will carry out the service with reasonable care and skill (Supply of Services (Exclusion of Implied Terms) Order 1983);


* Members of a society’s committee are not subject to personal liability for the society’s debts in the case of wrongful trading (trading when insolvent) (unlike directors of a company (see Insolvency Act 1986 s.214);


* Criminal liability for officers and members of the committee of registered societies in respect of criminal offences committed by the society under the CCBSA is arguably less strict than that imposed on officers of companies under the Companies Act.

* Rules requiring the publication of a prospectus prior to making an offer of “transferable securities” to the public do not apply to societies registered as community benefit societies under the 2014 or earlier Acts. However societies registered as bona fide co-operatives under the 1965 Act are subject to the prospectus requirements.

[Page updated: 13/03/2016]

 

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