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.
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:
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:
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.
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.
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:
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.
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.
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