Using legal form as protection for your social enterprise
We look at the different legal forms you can consider in order to safeguard the social purpose of your organisation
Legal form is of particular importance to social enterprises. As well as protecting you against insolvency, certain forms can actually protect the social purpose of your organisation.
The legal forms to consider
There are many ways to protect your social purpose: perhaps the most effective one of these is to register as a charity. However, if you are a charity, you must accept stringent regulation and all of your assets have to be used for the public interest.
Alternatively, you can register as a community interest company. This means you have an automatic asset lock and have to use all of your assets for the benefit of the community.
Or, you can register as a community benefit society. Again, it’s possible to draft the form with a lock so that assets have to be used to better the community.
Creating your own legal form
If none of these three forms suit the style of your organisation, you can create your own lock: if the members of a social enterprise agree on a purpose, you can write it in to the constitution of your organisation and effectively tie yourself to pursuance of this purpose.
However, this form lasts only as long as the members of your organisation agree. Once your board members change, or simply change their minds, you run the risk of losing the asset lock. If a majority decides the agreed ‘purpose’ is no longer central to the organisation, there is legally nothing you can do.
Abbie Rumbold of Bates Wells & Braithwaite, a firm specialising in charity and social enterprise, explains the situation: “The reason people tend to prefer a community interest company or a charity or a community benefit society is because you’re got statutory backing. There is a recognised regulator telling you what to do, as opposed to members who could change their minds at any point in the future.”
Most legal forms help you protect yourself against insolvency too. Many forms, with the exception of sole traders and partnerships, include a ‘limited liability’ clause.
This means if the business goes bust the assets of the people involved in the business are not implicated.
Any social enterprise or commercial business that’s planning to take on financially risky activities is well advised to take on limited liability.
If you’re thinking about taking on staff, for instance, you need to consider what will happen if a staff member has a fall and they have to claim against the company. You should also have good insurance.
Similarly, if you’re taking on a large lease there could be significant debts of rent; or, if you take on a large trading contract or any sort of service contract, if things go wrong you could end up owing a lot of money.
You must do all you can to make sure that your personal assets aren’t affected by the performance of your organisation.
However, this is not always possible. “A landlord might say to they’re not going to rent a premises out to you because you’re a limited liability company,” Abbie Rumbold explains. “If they know the company hasn’t got any assets, it could give you difficulties.”
You could even be made personally accountable for the lease. “It doesn’t always work,” Abbie cautions. “But it is something a landlord might require before giving the lease. As to whether or not to agree to this term, that is a commercial decision for the organisation and the individual, given all the circumstances.”