How do you start a social en­ter­prise – a manual

A growing number of charities and so-called social en­tre­pren­eurs opt to set-up a social en­ter­prise to advance their social or community mission. This business structure offers at­tract­ive ad­vant­ages: greater legal se­cur­it­ies (due to limited liability), tax reliefs and access to grants. But if you want to start a social or char­it­able business in the UK, you must first choose the right business structure. In this step-by-step guide, we’ll explain what you need to consider when setting up a char­it­able or­gan­isa­tion.

This step-by-step guide provides an ex­plan­a­tion of the actions you need to consider when launching a social en­ter­prise.

In the UK, a company that serves to help com­munit­ies is called a social en­ter­prise. Busi­nesses with char­it­able in­ten­tions can be set-up using the following legal forms:

• Charity
• Char­it­able in­cor­por­ated or­gan­isa­tion (CIO)
• Community interest company (CIC)
• Char­it­able trust
• Un­in­cor­por­ated company

The un­in­cor­por­ated as­so­ci­ation is a special type of social en­ter­prise that does not generate any profit, for example, a school sports club or a voluntary project.

Most people will start their social en­ter­prise as charities, CIOs or CICs. But before you get started, you should ask yourself which char­it­able, be­ne­vol­ent or ec­cle­si­ast­ic­al purpose your social en­ter­prise fulfils. It’s important to develop a clear concept of the unmet needs your charity is trying to address. Ask yourself if the company serves a unique purpose and who would be likely to support it. It’s also worth taking a closer look at the list of char­it­able purposes the UK gov­ern­ment accepts before re­gis­ter­ing your charity.

The majority of social en­ter­prise start-ups will set-up as charities. There are four charity struc­tures company owners can register as:

• Char­it­able company: A char­it­able company is one that is limited by guar­an­tees instead of shares, which means that owners and members are only liable for limited amounts. You will need to register with Company House, and if the business earns over £5,000, you will also need to register with the Charity Com­mis­sion.
• CIO: A CIO is a preferred business structure for medium-sized busi­nesses with employees and regular con­trac­tu­al ob­lig­a­tions. Compared to the char­it­able company, a CIO is a legal entity and as such conducts business more formally than a char­it­able company. Trustees are also protected from financial li­ab­il­it­ies. You will need to register with the Charity Com­mis­sion.
• Char­it­able trust: Trusts are usually started by a group of people. These are easier to set up and maintain. However, trustees could be held fin­an­cially liable. Trusts do not need to be re­gistered.
• Un­in­cor­por­ated charity: This is the simplest form of a social en­ter­prise. It is usually used by a group of vo­lun­teers to set up a small entity for char­it­able purpose. Un­in­cor­por­ated charities do not require re­gis­tra­tion, but they cannot hire staff or own premises.

Trusts and un­in­cor­por­ated charities are quick and easy to set up, but they do lack some of the personal liability se­cur­it­ies which re­gistered companies provide. Both CIOs and char­it­able companies (earning over £5,000 per year) require re­gis­tra­tion with the Charity Com­mis­sion. Char­it­able companies also need to register with Company House.

• CIC: A CIC is a special type of limited company that aims to help a community. In contrast to char­it­able companies, CICs are not operated solely for char­it­able purpose. Whilst charities can claim tax reliefs, CICs do not get tax breaks, even if their ob­ject­ives are not for profit. CICs are a good choice for companies that want to be branded as ‘social companies’ but are operating to make a profit. The ad­vant­ages of CICs include simpler ac­count­ing and financial reporting. However, setting up a CIC requires a greater bur­eau­crat­ic effort than other business struc­tures.

Once you’ve decided on the right legal form for your social en­ter­prise, you can begin to draft your business plan. This should include your company’s name, re­gistered business address, its mission, budgets, and an op­er­a­tion­al and or­gan­isa­tion­al overview.

If you’re going to set up a char­it­able company, CIO or CIC, you may also be required to write your charity’s governing document (CC2b). Because these legal business forms require re­gis­tra­tion, they may incur re­gis­tra­tion fees.

Social en­ter­prises are busi­nesses, and as such, you should have some capital right from the start to cover certain expenses. These include:

Companies House re­gis­tra­tion: Char­it­able companies and CICs typically need to be re­gistered with Companies House. This can cost between £27 to £40.

Charity Com­mis­sion re­gis­tra­tion: In addition, char­it­able companies earning over £5,000 annually and CIOs need to file their business with the UK’s Charity Com­mis­sion. Re­gis­tra­tion is free of charge.

Office space and equipment: You may be able to set up the business at home, to begin with, but as it grows, renting office space or premises may become a necessity. Un­in­cor­por­ated charities cannot lease premises. Office equipment such as a telephone and a laptop should also be included in any pre­lim­in­ary budget cal­cu­la­tions.

Staff: If your charity scales suc­cess­fully, you may have to hire staff to help you manage daily tasks. An estimated 91% of UK charities rely solely on vo­lun­teers to help them whilst 9% pay employees. If you are an un­in­cor­por­ated charity, you cannot hire employees.

As a char­it­able or­gan­isa­tion, most of the money you make will go towards your char­it­able cause. But how do you raise funds or attract sponsors? In the UK, charities and other companies can apply for a range of different grants to support their mission. For example, the Arts Council provides funding for art projects through money from the National Lottery. The Santander Found­a­tion offers grants for edu­ca­tion­al purposes that benefit dis­ad­vant­aged people. Grants Online allows you to search available grants for your type of social en­ter­prise or char­it­able purpose.

You could also apply for a bank loan, ask your friends or family to chip in or start a crowd­fund­ing campaign.

Charities and CIOs can get an 80 per cent tax relief. An ad­di­tion­al 20% in tax relief could be offered at the dis­cre­tion of your local authority. If, for example, your charity receives funding from your local authority, you are unlikely to receive this ad­di­tion­al tax break. Charities are required to pay tax on profits from any land or property they own and expenses that are not used for char­it­able purposes.

CICs do not receive tax breaks, or very rarely. They are liable to cor­por­a­tion tax and can apply for cor­por­a­tion tax reliefs.

Char­it­able busi­nesses, but not CICs, can also claim Gift Aid on donations. Gift Aid allows these busi­nesses to get an extra 25 per cent from a char­it­able donation. For example, if a donor sends you £10, using Gift Aid, you can claim another £2.50 on top.

Once you’ve suc­cess­fully set up a social en­ter­prise, you must keep up with a series of com­pli­ances in order to keep your company’s status.

• If you’re a char­it­able company or un­in­cor­por­ated charity, and your income was lower than £10,000 for the tax year, you only need to file an income report.
• If you’ve earned between £10,000 and £25,000, your annual tax return will include some ad­di­tion­al questions about your charity.
• Charities that earn more than £25,000 must also include a trustee annual report and a report from an in­de­pend­ent examiner.
• CIOs need to submit income returns and a trustee annual report.
• CICs are subject to UK company taxation laws.

The trustee annual report provides an overview of the work a charity does and how it is funded. In the simplest case, and if your company’s income does not exceed £500,000, the report should detail:

• The name of the business and its trustees
• In­form­a­tion on its or­gan­isa­tion­al structure
• Its annual achieve­ments and goals
• A review of its finances and debts

Charities that earn more than £500,000 will be required to produce a full trustee annual report. You can follow the statement of re­com­men­ded practice (SORP) guidelines.

Whether you register as a charity or operate as an un­in­cor­por­ated company will depend on your personal cir­cum­stances and company goals. It may be worth seeking legal advice when deciding on the business structure that’s right for you.

Please note the legal dis­claim­er relating to this article.