Social Enterprise Entity Structures

At AHACCOUNTANTS, we consider various legal forms for social enterprise activities. If you’re contemplating starting a social enterprise in the Nottingham area, we can provide the specialist advice you need.

A social enterprise entity is a business with primarily social objectives. Any surpluses generated are reinvested into the main principle of the entity or the community, rather than maximizing profit for shareholders. Examples of social objectives include local environmental regeneration, promoting climate change awareness, and providing training for disadvantaged individuals. The choice of legal structure depends on the specific activities of the social enterprise and the management style of its leaders.

Here are the possible structures to consider:

Limited Company

A limited company is a separate legal entity from its members, providing limited liability. Social purpose limited companies must outline their objectives, which may include commercial aims. You can set up a limited company as either a company limited by shares or a company limited by guarantee. Companies limited by shares can distribute dividends to shareholders. Limited companies must file accounts with Companies House, and an audit may be required.

If the company’s objectives are exclusively charitable, it can register as a charity, complying with relevant charity legislation (e.g., the Charities Act 2011 in England and Wales) and submitting Annual Returns for potential tax benefits.

Trusts

Trusts are unincorporated bodies that do not distribute profits. A trust governs how its assets are used, allowing it to hold property and other assets for the community. Trustees manage the assets on behalf of the community but bear personal liability for the trust’s obligations. Trust deeds protect the trust’s objectives, and an asset lock can secure assets for the intended community use.

Like limited companies, trusts can also be charities and must adhere to the same charity regulations.

Unincorporated Association

An unincorporated association is the simplest form for a social enterprise, suitable for individuals collaborating for a common social purpose. This structure involves minimal formalities, allowing members to set their own rules and elect a management committee. While associations can engage in commercial activities, they lack separate legal identity, making members personally liable for debts. This structure is not ideal for those looking to employ staff, secure funding, or enter contracts.

Unincorporated associations can also be charities, adhering to similar regulations as charitable limited companies.

Community Interest Company (CIC)

CICs are specific limited companies designed to benefit the community. This structure emerged to fill the gap for non-charitable social enterprises and can be set up as either companies limited by shares or by guarantee. CICs must pass the ‘community interest test’ before registration, distinguishing them from other companies focused on shareholder profit. They have an asset lock ensuring that assets serve community purposes.

A key advantage of a CIC is that its directors can receive remuneration, unlike charity trustees, and CICs face less stringent regulation. However, they lack the tax advantages that charities enjoy and must file an annual community interest report with the CIC regulator.

Charitable Incorporated Organisation (CIO)

CIOs and Scottish Charitable Incorporated Organisations (SCIOs) have advantages similar to limited company charities. Members and trustees are typically protected from the charity’s financial liabilities, and the charity enjoys its legal personality. CIOs do not register with Companies House but must register with their respective charity regulator.

Co-operative or Community Benefit Society

Community benefit societies (BenComs) are incorporated registered societies that operate for the community’s benefit. They must demonstrate their social objectives continuously. Registration is with the Financial Conduct Authority, with applicable fees varying based on the society’s rules. While BenComs differ from co-operatives, which focus on member benefits, both can function as social enterprise entities depending on their profit distribution and activities.