Company registration might not be required for every UK business, but the majority of companies need to register with Companies House. We introduce you to the registration body and explain the registration process for companies that need to be incorporated.
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.
The business purpose of a charity is to serve a common good. Find out more about the basic principles of a social enterprise, what distinguishes this legal form from others and its advantages and disadvantages.
This step-by-step guide provides an explanation of the actions you need to consider when launching a social enterprise.
How do you start 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:
- 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.
Types of social enterprises: choosing the right business structure?
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.
What are the costs of starting a social enterprise?
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.
Annual returns and trustee annual report
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.
What is a trustee annual report?
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.