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Day 2 Workshop, Michael Buckworth

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

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Day 2 Workshop, Michael Buckworth

  1. 1. 26 Curtain Road| London EC2A 3NY www.buckworths.com
  2. 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. 3. Social Enterprises: Which Business Structure Works For You?
  4. 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.
  5. 5. www.buckworths.com KEY CONSIDERATIONS • Protection of the social purpose • Grant funding • Flexibility • Taxation • Regulatory and disclosure obligations
  6. 6. www.buckworths.com 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
  7. 7. www.buckworths.com 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)
  8. 8. www.buckworths.com 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
  9. 9. www.buckworths.com 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”
  10. 10. www.buckworths.com • 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)
  11. 11. www.buckworths.com • 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)
  12. 12. www.buckworths.com 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/
  13. 13. www.buckworths.com • 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)
  14. 14. www.buckworths.com • 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)
  15. 15. www.buckworths.com ‘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
  16. 16. www.buckworths.com • 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
  17. 17. www.buckworths.com • 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
  18. 18. www.buckworths.com '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
  19. 19. www.buckworths.com ‘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
  20. 20. www.buckworths.com 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
  21. 21. www.buckworths.com 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
  22. 22. www.buckworths.com 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
  23. 23. www.buckworths.com 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. 24. 26 Curtain Road| London EC2A 3NY www.buckworths.com

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