Meeting legal requirements for social business 

A social business will be established as a specific type of legal entity, which grants the company important rights.

This includes a range of aspects, from entering into contracts with suppliers, customers, employees, and project partners to legal protection, membership rights and restrictions.  

In this section, we look at the processes involved in meeting legal requirements as a social business and how you are advised to report your trading activity.

Limited liability for social businesses 

Most forms of legal entity also provide the protection of limited liability to their members and directors and/or officers. Regardless of the legal form the social business has adopted, it’s subjected to all the laws of the land just like a real person, and those who do business with the company have a right to basic information about the business.  

To ensure that limited liability protection is not lost, legal entities such as companies, must provide this basic information on the public record. 

Internal legal reporting processes  

There are a number of steps you can incorporate in the internal processes of your social business to ensure legal reporting requirements are met and employees are complying with industry regulations.

Maintaining awareness of legal requirements 

It is important to ensure that there are real people keeping a grip on this on behalf of the social business. The first step is to understand exactly the kind of legal entity or regulatory body they need to report to and how to check that this legal record is up to date. For example, if the legal form of your social business is 'Company Limited by Guarantee', the regulator in question will be  Companies House.  

On the Companies House website is a register or listing of all companies. By entering the registered name or registration number it is possible to check that the company is still actually registered rather than struck off for some reason such as failing to provide regular information. If the company is de-registered it will have to be re-registered.  

The kind of legal entity and the unique registration number of your social business is on the Certificate of Incorporation or Certificate of Registration. 

Social business record keeping

A company is required to keep records and to share some of these with the regulator and some of them with the world in general.

For example, where is its registered office? It must share this with all its regulatory bodies and notify them when this changes. This helps authorities know where to write if they require information or if they want to notify the social business that they intend to turn up and examine the corporate records. 

Displaying the registration details of your social business 

The same information has to be available to the world in general in case people or other legal entities need to serve a legal notice. It is a legal requirement to put the registered office address on all communications from the social business that might involve the other party being involved in some contractual arrangement or risk or liability. This includes order documents, invoices, contracts, emails and the website (somewhere where people can find it like the home page, the about page or a footer on every page). 

Keeping a Register of Members

A company must keep a Register of all its members. In the case of a Company Limited by Guarantee, for example, the Register must have the current name and current address of all the members. 

A member is someone who: 

  • Qualified to apply for membership under the membership clauses of the Articles of Association. 
  • Has applied for membership through the procedure agreed by the Board of Directors. 
  • Has been accepted by the Board of Directors in a meeting which was properly minuted and their names appeared in those minutes. 
  • Signed their Guarantee Form to become a Guarantor. 
  • Was issued a Certificate of Membership and the date entered into the register.  

Keeping a Register of Members is necessary in case a liquidator needs to write to them and ask for the guaranteed sum, to which their liability has been limited through the incorporation of the company. 

This Register does not have to be shared with the regulatory bodies but it does need to be available to them if they ask.  

This demonstrates that a legal entity, if it is to obey the letter and the spirit of the laws which provide the facility of limited liability, must operate to high standards of procedure and record keeping. Those in charge of this area in a social business must be supported by their colleagues, especially those with responsibility for human resources development. The role is important, technical, exacting and should be supported by proper training inputs. A social business needs to keep very good records, sharing appropriate parts of that record with others – regulators, business partners and the public which then makes it much easier.  

Ultra vires

You should also keep records of what the servants of the social business are allowed to do on its behalf and what is therefore covered by the limited liability concept. If a member of staff or member of the organisation that owns the social business, or even a director, enters into a contract with an outside organisation or hires someone when they have been given no instructions to do so and no-one else is aware that they are doing it, they have stepped outside of the corporate responsibility and are acting 'ultra vires', or beyond the powers they have been given.  

The consequences to an individual acting 'ultra vires'  may include, but not be limited to a) being fired for gross misconduct and b) being sued for compensation. 

To avoid acting 'ultra vires' the individual needs to know that there is a trail back to the fount of all power to act – the Board of Directors. This may be, for example: 

  • a minuted decision to give them specific power to act 
  • a policy decision giving general powers to act 
  • a job description requiring action 
  • a budget implying action 

The general principle here is that ‘if it wasn't written down it didn't happen’, so all decisions need to be officially documented to ensure they binding. If a decision was made, but wasn’t documented,  legal entity concerned will having no proof of the process and will have to believe that the decision was never made. It is a legal requirement to keep records of decisions, the better the records the better for everybody and the more likely that the social business will develop an understanding of the significance of good governance. 

Reporting your social business activity to regulators

Reporting requirements for Companies House 

In addition to the elements outlined above, a Company Limited by Guarantee is required to share its Register of Directors and Annual Financial Statements with Companies house and these go on the public record for anyone to search on Companies House.

This way the regulator knows who to ask searching questions of if they suspect all is not as it should be, or there are holes appearing in the public record. Anyone can check who is responsible for providing sound management of a company.  This information could be useful for several reasons, for example, if considering a potential trading partner. 

Similarly, they have a right to know what reserves the company has and how good its trading performance is (how likely they are to get paid). For this reason it is also important to put on company record details of mortgages and charges placed by lenders on any or all of the assets owned by the social business as clearly, in the event of bankruptcy these assets would disappear before the trade creditors were able to claim against them. Again the quality of the information shared can only be as good as the financial records kept.  

Depending on size and turnover of the social business concerned there may be external audit requirements. The numbers involved here can change annually, the person(s) involved in ensuring it’s all done properly will need to stay up to date. Information is useless if it is way out of date. So Companies House require information about appointment and resignation of directors to be with them in a matter of days and financial statements within 8 months and each year every company must complete a confirmation statement.  

Reporting requirements for other regulators 

The above is merely an instructive example. There are many other regulators a social business might need to report to (from additional corporate records kept). Co-operative Societies, Community Benefit Societies, and Credit Unions for example have the Financial Conduct Authority  as their regulator. While the concepts are broadly similar, the reporting mechanisms are different. 

Companies Limited by Shares are registered with Companies House but have additional recording and reporting requirements related to classes and issues of shares. 

All legal entities have to complete tax returns and furnish accounts to Her Majesty's Revenue and Customs  (HMRC) and of course, if they are employers they must record wages, collect income tax and National Insurance. All enterprises of any kind have reporting obligations to the Health and Safety Executive.

Some legal entities have a legal status beyond their legal form, so the social business in the example above in addition to the legal form 'Company Limited by Guarantee' might have the additional legal status 'Community Interest Company'. It will therefore be required to generate and share with their Regulator annually a statement of what they have done and achieved in pursuit of the Community Interest Statement that they furnished them with upon registration. The information in the  Social Accounting Zone  would be of help here. 

Each social business will operate in a particular trade(s) and these might have regulators of their own. They are very likely to require some sort of planning permission from their local authority or other bodies to do what they do and/or adapt premises in which to do it. All social businesses that employ people have to maintain personnel records that demonstrate they meet the requirements of employment law.  

All social businesses that retain information on individual people are subject to regulation under GDPR. The relevant regulator is the Information Commissioners Office

The good news is that over recent years there has been a government-led initiative to make all these regulatory bodies more user-friendly, making them genuinely helpful and supportive. They all take being on your side, helping you get it right and making it easy to meet the requirements (for example, by web filing) very seriously. 

Get started on reporting your legal requirements with our social business compliance guide: