A guide to third sector trading - WCVA

It’s an idea, but is it business? A guide to third sector trading
1: Getting
started
2: First steps 3: Business
planning
4: Legal and
governance
5: Funding
and
resourcing
6: Financial
controls
7: Managing
growth
8: Management
and
governance
9: Social
enterprise
10: Sources
of support
• The parent charity’s name can be included in the name of
the trading subsidiary, so long as this does not give the false
impression. It is acceptable to use a form of name like: “[charity
name] Sales Company Ltd” for the subsidiary.
• Company law restricts the use of the words “charity” and
“charitable” in the name of any company, and they should only
be used in the title of the subsidiary if they form part of the
parent charity’s name.
Pros and cons of trading subsidiaries
The advantages of trading subsidiaries:
• charity law: A charity is not allowed to carry out any substantial
trading activity – whether or not it is primary purpose trading or
ancillary trading as described in section 4.3 – because this could
put the assets of the charity at risk. (For instance, the business
might fail leaving debts which the charity would have to meet.)
Trading by a subsidiary company instead removes
this danger.
• protecting the organisation’s assets: Non charities are not
compelled to take the same course to protect their core activities
and their buildings and other assets from the possible failure
of trading activities, though they often choose to use trading
subsidiaries too.
• tax benefits: The most compelling reason for establishing
the structure of a parent charity with one or more trading
subsidiaries is that if business profits are transferred by Gift Aid
to the charity they escape Corporation Tax. For many aspiring
enterprises the choice to set up a tax saving subsidiary is a
no brainer.
• clarity: for charities the split between social (charitable) and
commercial activities can provide clarity for staff and volunteers,
and be useful for promotion and marketing purposes.
• management: It can be extremely useful to be able to create a
harder-nosed business culture in the trading operation which
is distinct from the parent charity’s more socially-orientated
role in looking after the interests of volunteers, trainees and
disadvantaged groups of users and clients.
Disadvantages of the trading subsidiary approach:
• cost and complexity: In some cases parent companies set up
every trading activity as a separate subsidiary company. This
can become messy and expensive for small organisations to
administer if there are more than two or three trading ventures.
For instance, accounts must be prepared and filed at Companies
House separately for each company.
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