Most enterprises create and register a new separate legal structure, to be the legal vehicle for the enterprise, through the process of incorporation.
This new legal entity has a separate existence from its members, which:
- limits the personal liability of those involved (as Members or Directors)
- allows the enterprise to enter into contracts in the name of the enterprise
- gives more choice with regard to finance
- may make people take the enterprise more seriously
Legal structures of businesses
Companies have both Members and Directors, who are often the same people in small enterprises. In the contexts of social business, companies are either limited by shares or guarantee.
Features of different types of legal structures for organisations
The commonly incorporated UK legal forms used by social businesses are listed below:
Private Companies are commonly used, well understood legal forms. The governing document of a company is its Memorandum and Articles of Association. There are two sorts of Private Company:
- Private Company Limited by Shares - the members of the company are shareholders who have invested money in the company. The size of the shareholding is normally proportional to the voting power of the shareholder. The shares of the members are at risk.
- Private Company Limited by Guarantee. The company has members, but no shareholders. The members guarantee to contribute to the debts of the company up to a nominal amount (normally £1). This is the most common legal form for a social business.
A private company limited by guarantee is the most common legal form for a social business.
Community Interest Company (CIC)
A CIC is a type of company with provisions in their Memorandum and Articles of Association which:
- Lock the assets of the business. This normally prevents assets being disposed of for less than their full value and prevents the residual assets of the business being shared amongst the members if it is wound up.
- Limit or prevent the distribution of profits to the members.
CICs also have to demonstrate and report on their benefit to the community.
Registered Societies, formally Industrial and Provident Societies, are a traditionally democratic, large membership legal form. Over time, they have established a reputation as a socially responsible, philanthropic and co-operative type of business.
Despite being share-based, registered societies are democratic. Instead of the ‘one share one vote’ system of other share-based legal forms, they have adopted a ‘one member one vote’ approach. Societies are registered with and regulated by the Financial Conduct Authority (FCA).
There are 2 types of Registered Society:
1. Co-operative Society
Co-operative Societies are the only UK legal structure that has to be a co-operative (a democratic business owned and run by the people who trade with it). A co-operative exists for the mutual benefit of its members, who trade with it and share in the profits.
2. Community Benefit Society
Community Benefit Societies, whilst often having a large community based membership, differ from Co-operative Societies in that they primarily exist to benefit the wider community rather than their members and they can only apply their profits for the benefit of the community.
This doesn't prevent them paying limited interest on members' shares and indeed this legal form is often used for businesses financed through community investment.
Charitable Incorporated Organisation (CIO)
A relatively new legal form which is by definition charitable. Formerly, in order to create an incorporated charity, it was necessary to form a company and then apply to the Charity Commission for charitable status. A CIO is registered directly with and then regulated by the Charity Commission.
Partnership legal structure
Limited Liability Partnership (LLP)
Traditionally partnerships are an unincorporated legal form, where the partners shared profits and risk. In an LLP, the partners still share profits in accordance with their LLP agreement, but their personal liability is limited.
LLPs submit tax returns but are not liable for Corporation Tax. Instead, the partners are liable for tax on their share of any profits. LLPs are registered with Companies House, and mainly used for consortia of businesses.
The next step in the start-up process is choosing the structure for your social business.
Pros and Cons and Key Features of the different incorporated legal forms
To view the contents in the table, please swipe left and right.
|Legal Form||Governing Document||Registrar/ Regulator||Can issue shares?||Can be a charity?||Has an asset lock?|
Company Limited by Shares
|Articles||Companies House||Yes||Very rarely||No|
Company Limited by Guarantee
|Articles||Companies House||No||Yes||No (unless also a charity)|
CIC Limited by Shares
|Articles||Companies House and CIC Regulator||Yes||No||Yes|
CIC Limited by Guarantee
|Articles||Companies House and CIC Regulator||No||No||Yes|
|Rules||Financial Conduct Authority||Yes||No||No|
Community Benefit Society
|Rules||Financial Conduct Authority||Yes||Yes (exempt charity)||Yes|
Charitable Incorporated Organisation
Limited Liability Partnership
|Agreement or Deed||Companies House||No||No||No|