Workshop: Social enterprises: which business framework works for you? Social Enterprise Festival 2019

1. 26 Curtain Road| London EC2A 3NY
www.buckworths.com

2. www.buckworths.com
ABOUT BUCKWORTHS
The Firm
• Only law firm in London working solely with startups
• Advised on 45% of the seed investment rounds in 2018
• Significant practice advising non-UK companies
About Me
• Studied law at Merton College, Oxford University
• Trained and qualified at Shearman & Sterling LLP and subsequently practiced at
Cleary Gottlieb Steen & Hamilton LLP
• Set up Buckworths in 2011

3. Social Enterprises: Which
Business Structure Works For
You?

4. www.buckworths.com
WHAT IS A SOCIAL ENTERPRISE?
• A business trading in goods and/or services that has a primary objective
for social or environmental benefit.
• Most of its surplus (profit) is either retained or reinvested to further the
organisation’s objectives.

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KEY CONSIDERATIONS
• Protection of the social purpose
• Grant funding
• Flexibility
• Taxation
• Regulatory and disclosure obligations

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SOCIAL ENTERPRISE STRUCTURES
• Company limited by shares (CLS)
• Company limited by guarantee (CLG)
• Community Interest Company (CIC)
• Industrial and Provident Society
• ‘Co-operative’
• ‘Community Benefit’
• Charity/Charitable Incorporated Organisation

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COMPANY LIMITED BY SHARES (CLS)
• What is it?
• Company structure where owners (shareholders) hold shares in the
company
• Shares carry an entitlement to vote at meetings of the company, receive a
dividend, and share in a distribution i.e. they carry ownership rights
• Standard “for profit” structure
• Use for social enterprise?
• Inclusion of social purpose in the articles
• Inclusion of “Mission Lock” – company’s purpose cannot be changed
without a super-majority decision
• Inclusion of “Asset Lock” – excess profits and assets cannot be distributed
without a super-majority decision (or change to the articles)

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COMPANY LIMITED BY SHARES (CLS)
• Benefits
• Flexible structure
• Mission and Asset Locks can be removed
• Social purpose can be changed
• No additional disclosure requirements
• Mix of profit and social enterprise can be more attractive to investors
• Disadvantages
• May not qualify for grant funding
• May not be sufficiently attractive to SITR investors
• Too flexible – may not lock in social purpose

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COMPANY LIMITED BY GUARANTEE (CLG)
• What is it?
• Company structure without shares or shareholders
• Owned by guarantors who provide a guarantee (typically of a nominal
amount) which is then the extent of their liability should the company be
wound up
For more information please visit:
https://www.bupa.com/corporate/what-we-do/our-customer-focus
• Example:
• The British United Provident Association
Limited (BUPA)
• “with no shareholders, our customers are our
focus and our ambition is to be known as a true
customer champion in health and care”

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• Tax Implications
• Corporation tax on its taxable profits
• Company must: inform HMRC upon commencement of trading, submit
annual Company Tax return and register for VAT (if applicable)
• Standard approach for any non-charitable business
• Social Purpose
• Profits are reinvested to help promote non-profit objectives of the
company rather than benefitting its members
• No owners to whom profits can be paid
• Officers may draw a salary within the rules of the company
• Reporting Requirements
• Companies House filings, including submission of annual return and
accounts, each of which is publicly available
COMPANY LIMITED BY GUARANTEE (CLG)

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• Benefits
• Limited liability, specific to amount guaranteed
• Profit (mostly) locked into the company
• Suitable for any size of organisation, allowing startups to expand
without restriction
• Eligible for grant funding
• Possible to transfer assets to a CLS allowing a for profit objective to be
pursued
• Disadvantages
• Harder to exercise management control
• Funded through loans and guarantees only (i.e. no equity)
COMPANY LIMITED BY GUARANTEE (CLG)

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COMMUNITY INTEREST COMPANY (CIC)
• What is it?
• Basic company structure i.e. limited by shares or guarantee that uses profits
and assets for the public good, but is precluded from registering as a charity
• CIC subject to the ‘Community Interest Test’
• Example:
• Investors in People CIC
• “gives the community insights into their current people management performance
by translating employment feedback into actionable change”
For more information please visit: https://www.investorsinpeople.com/

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• Tax Implications
• Same tax treatment as a basic structure limited by shares or guarantee
• Social Purpose
• Asset Lock built into the articles and cannot be removed
• Limits the ability to distribute profits and assets to ensure their use for the
benefit of the community
• Assets of CIC must be transferred to another asset locked body when the CIC
is closed
• Reporting Requirements?
• Standard Companies House filings (confirmation statement, annual
accounts)
• Plus annual CIC report and (audited) accounts
COMMUNITY INTEREST COMPANY (CIC)

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• Benefits
• Asset Lock
• Controls over the amounts the owners / managers can draw from the
company
• Profits and assets used for the public good
• Regulated (by CIC Regulator)
• Eligible for grant funding
• Disadvantages
• Inflexible structure – once assets are in a CIC, you can’t get them out again
• Extremely difficult to convert into a for profit company
• Community interest test can be tricky to meet for some social enterprises
COMMUNITY INTEREST COMPANY (CIC)

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‘CO-OPERATIVE’ INDUSTRIAL AND PROVIDENT SOCIETY
• What is it?
• Corporate structure used to benefit its members rather than society at large
• Originates from the ‘cooperative movement’
• Control and ownership is equally held, not based on the level of investment
of each member, voting is on a one member, one vote basis
• Example:
• John Lewis Partnership PLC
• “group of people acting together to meet the common needs and aspirations
of its members, sharing ownership and making decisions democratically”
For more information please visit:
https://www.johnlewispartnership.co.uk/csr/our-approach.html

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• Tax Implications?
• Same tax treatment as a basic structure limited by shares or guarantee
• *May qualify for full or partial exemption from tax liability where regarded a
“mutual trading concern”
• Social Purpose?
• Focuses on creating value for customers rather than big profits for
shareholders
• Incentivises members to contribute to the value of the business – see John
Lewis where each member of staff is a “partner"
• Liability?
• Company has separate legal personality existing independently of its
members, who have limited liability
‘CO-OPERATIVE’ INDUSTRIAL AND PROVIDENT SOCIETY

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• Reporting Requirements
• File annual return and keep proper books of account
• Submit an annual return to the FCA (balance sheet and auditor’s report)
• Keep on display in a prominent position at the registered office a copy of the
latest balance sheet
• Benefits
• Flexible – the form of the business can be changed if required
• Focus on members – good structure to feed profit to a community or
membership
• Disadvantages
• Unlikely to qualify for grant funding
• Complex to operate; relatively unusual
• No automatic restrictions on distribution of profits – emphasis on equal
shares
‘CO-OPERATIVE’ INDUSTRIAL AND PROVIDENT SOCIETY

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'COMMUNITY BENEFIT’ INDUSTRIAL AND PROVIDENT SOCIETY
• What is it?
• Essentially identical to a “Co-operative” IPS, but locks in a community
benefit
• Adopts the ‘equal stake, equal say’ for decision-making
• Example:
• Taunton Association for the Homeless (‘ARC’)
• “Arc are a local homeless charitable organisation, supporting over 450
people per year”
For more information please visit:
https://www.arcinspire.co.uk/About-Us/Who-we-are.aspx

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‘COMMUNITY BENEFIT’ INDUSTRIAL AND PROVIDENT SOCIETY
• Benefits
• Stronger community benefit than “Co-op”
• Ability to create asset lock
• May be eligible for grant funding
• Used to assist specific categories of people where the categorization would be
too narrow for a CIC
• Disadvantages
• Complex to operate
• No automatic restrictions on distribution of profits – emphasis on equal
shares
• Equal voting rights may not be ideal

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CHARITY
• What is it?
• Not for profit structure meeting strict eligibility criteria
• Used to promote solely charitable purposes
• Benefits
• Only structure with taxation benefits
• Rates relief
• Qualifies for Gift Aid, donations and grant funding
• Disadvantages
• Highly regulated
• (Onerous) obligations on managers – trustees
• Trustees cannot take a salary
• Expensive to operate
• Very restrictive to qualify
• Charity cannot trade

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HOW CAN WE HELP?
• We can assist with:
• Incorporation and set up
• Website terms and conditions
• Customer contracts
• Privacy policies
• Commercial agreements
• Employment / contractor agreements
• IP agreements and protection
• Shareholders’ / founders’ agreements
• Investment rounds (SEIS / EIS / VC)
• Sale of business

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FURTHER INFORMATION
• Take our free “introduction to startup law” brochure
• Contact us for our “introduction to GDPR” brochure
• Check out our website at www.buckworths.com
• Contact us by email at mbuckworth@buckworths.com or telephone
02079521723
• View our videos on SEIS, Trademarks, GDPR and other topics accessible from our
website
• Follow us on Instagram @buckworthslaw

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CHARITABLE PURPOSES
• relieving poverty
• education
• religion
• health
• saving lives
• citizenship or community development
• the arts
• amateur sport
• human rights
• religious or racial harmony
• the protection of the environment
• animal welfare
• the efficiency of the armed forces, police, fire or ambulance services

24. 26 Curtain Road| London EC2A 3NY
www.buckworths.com