A guide to third sector trading - WCVA

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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 4.2 The options for trading organisations This section describes the options for legal structures for social enterprise organisations, and attempts to remove the terror experienced by many people when they try to make a choice. Basic issues Apparent complications: There are understandable reasons why people get nervous about selecting an appropriate legal structure, even though the risks are small. • Some people new to work in the third sector find it strange that limited companies can also be charities, and vice versa. The idea that ‘ordinary people’ might become company directors can also be alien, particularly to residents of disadvantaged communities where regeneration organisations often operate. So there may be logical and emotional barriers from the start. • Recent government efforts to reform charity law and help (albeit in a small way) third sector trading organisations are complicating what was already a somewhat perplexing array of choices. • The apparently worrying implications of the term ‘legal structures’ may tend to compound the concerns of some steering group members. • The options require a string of unfamiliar either/or decisions – not a simple choice from a list – and people may feel unsure where this leads them. Some assurances: Information alone may not be enough. Sometimes what’s really needed is reassurance. Here’s a start. • You already have legal responsibilities: Getting legally constituted does not expose you to greater risk – it helps you to manage your responsibilities better. • Third sector trading organisations need to be run by limited companies of some kind (see Section 4.1), so you can forget about the unincorporated association option used elsewhere. • Basic types of limited company: There are only four distinct forms of limited company or partnership (which are each defined by who owns them) – and only two of these are relevant to mainstream trading activity in the third sector. 78
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 four are: − public limited companies (forget these – you will not be forming a plc!) − limited liability partnerships (designed primarily for individuals) − companies limited by shares (used occasionally by community trading ventures) − companies limited by guarantee. • Flexibility: Companies limited by guarantee or by shares allow for enormously flexible arrangements. If people make mistakes, it is not usually structures which they get wrong but the way they adapt them in their individual circumstances. Making adjustments later is also simpler than most people imagine. • Structures with special uses: Two new legal structures have emerged recently. You can treat them as ‘optional extras’ rather than difficult core choices. They are: − Charitable Incorporated Organisations (CIOs) – these will be companies limited by guarantee which have ‘built in’ charitable status. • The new legal structures in context: It’s true that CIOs and CICs have complicated the choices for new trading enterprises. But they are not important enough to lose sleep over. Here are some more reassurances: − The new options are actually only variations of the existing structures and arrangements for companies limited by guarantee or companies limited by shares. − Most of what they offer small to medium size trading organisations in the third sector can be achieved by the other existing arrangements. So they don’t make a fundamental difference to your choices, whatever their advocates might tell you. − If you see advantages to using one of these structures, do so. They are harmless. − But in the unlikely event that you make a bad choice initially you can in most circumstances change the structure at a later stage. You will experience inconvenience rather than legal sanctions. But it is true that poor decisions might possibly mean that you pay more tax. − Community Interest Companies (CICs) – these are specially regulated companies which are either limited by guarantee or limited by shares. 79
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A guide to third sector trading - WCVA

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