North Belfast Partnership - Social Economy Training
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Course Introduction
Module 1 - What is a Social Economy?
Module 2 - The Idea
Module 3 - The Organisation
Module 4 - The Legalities
Module 5 - Finance
Module 6 - Sales and Marketing
Module 7 - Social Audit
Module 8 - Premises
Module 9 - Equipment
Module 10 - Staff
Module 11 - Business Plan

Accessibility Information

EU funded

4. Make Sure Your Social Enterprise Will Be Set Up Legally

The information contained in this section is intended to act as an introductory guide to the different legal structures available and the process of setting up a Social Enterprise; we would strongly recommend that anyone considering establishing a Social Enterprise should see a solicitor and seek up-to-date, expert legal advice relevant to their particular situation.

The 4 legal forms

Social enterprises are often run for the benefit of the wider community, and in the course of pursuing their social aims, often business and commercial transactions are undertaken. It is in everyone’s best interests to ensure that the social enterprise is run in an organised and accountable way, adopting a formal legal structure not only serves to legitimise the work of the group or enterprise to the wider community, but can also provide protection to individual members from legal liability. It is therefore essential to have an understanding of the four main types of legal structure applicable to social enterprises, and the differences between them. In this way, you can have a better idea as to which structure is most applicable to your situation. (Click each button for more information on each legal form)

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The most popular legal form

The most common legal structure for a social organisation is a company limited by guarantee. There are five different types of company:

  1. Company Limited by Shares
    This type of company is very common to the commercial sector, members pay part of the “share price” to the company and their remaining liability is limited to the unpaid amount outstanding on those shares.
  2. Unlimited (Share) Company
    Two or more individuals are required to establish this type of company, since shares are unlimited, this means that there is no limit of member’s liability.
  3. Company Limited by Guarantee
    This is the most common form of company in the community and voluntary sector. One or more individuals subscribing to the Memorandum of Association is required to form such a company. A member’s legal liability is limited to a nominal sum, typically £1, which in legal terms represent their guaranteed contribution to the company’s assets if it should be wound up. Directors do not usually benefit from their position and are personally liable for fraudulent, negligent or wrongful trading.
  4. Public Company Two or more people must subscribe to the Articles of Association to form a public company and there must also be an authorised share capital of a minimum figure in the region of £50,000. Similar to the Company Limited by Shares, a member’s liability extends only to the amount unpaid on shares held by them.
  5. Off-the-Shelf Companies Unless you are very experienced and informed in the area of company formation and legal structures, it is perhaps best not to purchase an off-the-shelf company. They can be bought from a solicitor, accountant, company registration or company formation agent – however in order to keep costs low there is no advice or guidance supplied from the latter two suppliers, meaning you need to know exactly what you need and what are buying. Off the shelf companies usually are companies limited by shares and not by guarantee.

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Can we change legal status?

It is possible to change from one legal form to another, for example often unincorporated bodies change status to become companies. NICVA provide useful information and advice as to this process and the related practicalities.

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Charities and Charitable Status
Registration as a charity is a possibility for unincorporated associations and companies limited by guarantee if their aims relate to any of the following:

  • Advancement of education
  • Advancement of Religion
  • Alleviation of suffering and distress
  • Other purposes beneficial to the community (e.g. alleviating unemployment, local regeneration)

Charities are run for the benefit of their beneficiaries and they receive rate and tax relief.

If an established charity wanted to set up a new company, they may consider establishing the social enterprise as a trading subsidiary. A trading subsidiary attracts limited liability as a separate company limited by guarantee. The parent charity retains control and any profits from the trading subsidiary may be tax efficiently convenanted back to the parent charity.

If a charitable company limited by guarantee is being established, extreme care needs to be taken when drafting the Memorandum of Association (especially the objects of the company.) NICVA advises using a suitable model to ensure that you will be complying with Charity Law – either way it should be considered an essential that a draft is submitted to the Inland Revenue for review and to highlight any potential problems. Charity case law holds examples of the Inland Revenue challenging legitimacy, so it is highly advisable to seek their input and ensure everything is in order before trading commences.

 

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