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
How does this help the charity?
What about the charity? In the real world of third sector trading
many entrepreneurs will, and should be, motivated by the
promise of developing businesses which are owned by socially
responsible organisations. They will be driven by enthusiasm to
create perceived benefits which may not in themselves achieve the
charitable objects of the organisations which set them up – new
jobs, management of resources and services by the clients and
beneficiaries and so on. Unfortunately, this is not, in legal terms,
the purpose of the trading subsidiary. So are the trustees and
subsidiaries out of order?
Returning funds to the charity: A central job of the subsidiary
is to help fund the charity. But this is not difficult to demonstrate
in a reasonable well-planned social enterprise. The funding might
take the form of a direct return on the investment or other indirect
advantages:
• the loan repayments and the interest payable on them
• Gift Aid (see section 7.6) which is technically a return on the
charity’s shareholding in the trading organisation (the benefits
of Gift Aid in this context entirely outweigh any reason to pay
share dividends)
• rent payments for accommodation which the charity would not
otherwise be able to let
• the shared use of (through user charges) of equipment needed
by both the charity and its subsidiary (there could be technical
tax implications for this as earned income for the charity, but it is
very likely to qualify as small scale trading).
Clarifying the charity’s objects: One interesting repercussion of
planning to launch trading activities is that trustees may come to
see the possibility of changing their charitable objects.
• The area of benefit: The most obvious example is to extend the
geographical area of benefit so that the charity can generate
income from selling its services in other towns or counties
without this being regarded as a fundraising activity. This does
not usually prove difficult to achieve.
• Changes of purpose: More problematic is changing a
charity’s purposes. For instance, a charity which was set up to
provide recreational facilities for children up to the age of 11
may see commercial opportunities for providing training for
disadvantaged teenagers and young adults. But it would need
to change its charitable objects if this activity is to be seen as
‘primary purpose trading’ rather than fundraising.
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